As filed with the Securities and Exchange Commission on June 24, 2002
Registration No. 333-64014
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM SB-2/A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-effective Amendment No. 1
PACIFIC WEBWORKS, INC.
(Name of small business issuer in its charter)
Commission file No. 000-26731
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Nevada 7372 87-0627910
(State of incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
180 South 300 West, Suite 400
Salt Lake City, Utah 84101
(801) 578-9020
(Address and telephone number of registrant's principal executive offices
and principal place of business)
Christian R. Larsen, President
180 South 300 West, Suite 400
Salt Lake City, Utah 84101
(801) 578-9020
(Name, address and telephone number of agent for service)
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Copies to:
Cindy Shy, Attorney
Cindy Shy, P.C.
525 South 300 East
Salt Lake City, Utah 84111
(801) 323-2392
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the registration statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
This combined prospectus relates to
Form S-1,Registration No. 333-38026,
and Form SB-2, Registration No. 333-64014
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If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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Proposed Proposed Amount of
Title of each class Amount maximum maximum registration fee
of securities to be offering price aggregate previously
to be registered registered (1) per unit (2) offering price paid (3)
- --------------------- --------------- --------------- --------------- ----------------
Common Stock 5,600,000 $ 0.215 $ 1,204,000 $ 110.73
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(1) This registration statement covers the resale by certain selling stockholders of
up to an aggregate of 5,600,000 shares of common stock of the issuer. Of the
aggregate shares, 600,000 shares are being carried forward from our Form S-1,
Registration No. 333-38026, and 5,000,000 shares are carried forward from our
Form SB-2, Registration No. 333-64014.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act, based on the average of the
high and low prices of the common stock as of June 19, 2002.
(3) Pacific WebWorks, Inc. previously paid a filing fee of $506.25 for the 600,000
shares which are carried forward from the Form S-1, Registration No. 333-38026,
and paid a filing fee of $431.25 for the 5,000,000 shares carried forward from
the Form SB-2, Registration No. 333-64014.
Pacific WebWorks, Inc. hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until we shall file a
further amendment which specifically states that this registration statement
shall become effective in accordance with Section 8(a) of the Securities Acts
of 1933 or until the registration statement shall become effective on such
date as the Commission, acting pursuant to Section 8(a), may determine.
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PROSPECTUS
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| SUBJECT TO COMPLETION |
| |
| The information in this prospectus is not complete and may be changed. We |
| may not sell these securities until the registration statement filed with |
| the Securities and Exchange Commission is effective. This prospectus is |
| not an offer to sell these securities and it is not soliciting an offer to |
| buy these securities in any state where the offer or sale is not permitted.|
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Pacific WebWorks, Inc.
a Nevada corporation
5,600,000 shares of common stock
______________
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| |
| Trading Symbol |
| | We are registering 5,600,000 shares of our
| NASD OTC Bulletin Board | common stock which will be sold by
| | selling stockholders.
| "PWEB" |
| | We will not receive the proceeds from
| On June 17, 2002, the high | the sale of these common shares sold
| bid was $0.21 | by the selling stockholders.
| and the low ask was $0.25. |
| |
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Investing in the common stock involves a high degree of risk.
You should review the "Risk Factors" beginning on page 4.
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| Neither the Securities and Exchange Commission nor any state securities |
| commission has approved or disapproved these securities, or determined if |
| this prospectus is truthful or complete. Any representation to the |
| contrary is a criminal offense. |
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Prospectus dated June 20, 2002
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TABLE OF CONTENTS
PROSPECTUS SUMMARY.........................................................3
RISK FACTORS...............................................................4
USE OF PROCEEDS............................................................8
MARKET FOR COMMON EQUITY...................................................9
MANAGEMENT'S DISCUSSION AND ANALYSIS......................................10
BUSINESS..................................................................16
PROPERTIES................................................................23
LEGAL PROCEEDINGS.........................................................23
MANAGEMENT ...............................................................24
PRINCIPAL STOCKHOLDERS....................................................27
DESCRIPTION OF SECURITIES ................................................28
SELLING STOCKHOLDERS......................................................29
PLAN OF DISTRIBUTION......................................................31
INTEREST OF NAMED EXPERT AND COUNSEL......................................32
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITY.........................................33
AVAILABLE INFORMATION.....................................................33
CHANGES IN ACCOUNTANTS....................................................33
FINANCIAL STATEMENTS......................................................34
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. The selling stockholders are offering and
selling the shares only in jurisdictions where offers and sales are permitted.
The information in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of the prospectus or any sale
of the shares.
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PROSPECTUS SUMMARY
Pacific WebWorks, Inc.
180 South 300 West, Suite 400
Salt Lake City, Utah 84101
(801) 578-9020
The Offering. Pacific WebWorks, Inc. is registering 5,600,000 common
shares to be sold by selling stockholders, who are identified in "Selling
Stockholders," starting on page 29. We are registering these shares as a
result of agreements we have entered into with the selling stockholders and
these transactions and agreements are described in more detail in "Selling
Stockholders - Transactions Related to the Offering," starting on page 30.
We will not receive any of the proceeds from the sale of the shares which
are being registered for the selling stockholders. These shares will be sold
from time to time and at the total discretion of the selling stockholders.
See "Plan of Distribution," starting on page 31, for further details about the
possible methods of sale which may be used by the selling stockholders.
Shares of common stock offered by selling stockholders 5,600,000
Common stock outstanding after the offering 28,686,504
Common stock owned by selling stockholders after the offering 0
The Company. Pacific WebWorks, Inc. engineers business software
technology for the Internet based on our proprietary source code. Our premier
products Visual WebTools(TM) and the IntelliPay payment system, allow the
small- to medium-sized business owner to expand their business onto the
Internet. Our products allow a business to create, manage, maintain and edit
its own web site, as well as process and manage income from Internet
transactions. Further discussions of our business and products can be found
in "Business," starting on page 16.
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RISK FACTORS
Potential investors should carefully consider the following risk factors
before deciding to buy our common stock. Each investor should also consider
the other information in this prospectus. Investing in our common stock
involves a high degree of risk and you should not invest in our common stock
unless you can afford to lose your entire investment.
Risks Related to the Offering
We do not anticipate paying dividends in the foreseeable future, which
may discourage potential investors from purchasing our common stock.
We have not paid cash or stock dividends on our common stock and we
intend to retain future earnings to finance our growth and development.
Potential investors should not anticipate receiving dividends from our common
stock.
Investors may have difficulty selling our shares due to limited trading
activity in our market and penny stock regulations.
There has not been a large public market for our common stock and we can
not ensure that an active trading market for our stock will develop, or how
liquid that market might be. Investors may be unable to resell their common
stock at or above the price they pay for the common stock. Also, our common
stock is subject to the Penny Stock Suitability Reform Act of 1990, which is
discussed in more detail in the "Market for Common Equity" section, below.
These rules may restrict the ability of broker-dealers to trade or maintain a
market in our common stock and may affect the ability of shareholders to sell
their shares. For example, these rules require broker-dealers to take
additional steps when completing a trade in our shares, including determining
the suitability of the stock for a particular customer and obtaining a written
agreement from the customer prior to the purchase of the stock.
The market price of our common stock could drop as a result of sales of
additional common stock in the market after the effective date of this
registration statement.
We are registering 5,600,000 common shares and, in addition, we have
granted options to purchase 3,630,409 common shares under our employee
incentive plan, with 2,127,440 of those options exercisable as of June 10,
2002. Also, we have additional outstanding warrants to purchase 1,300,000
common shares. The sale of these shares into our market, or the perception
that these shares will be sold into our market, could cause the market price
of our common stock to drop significantly, even if our business is doing well.
Our revenues and operating results can be expected to fluctuate, which
may negatively affect our stock price.
Our quarterly results have varied significantly from period to period and
we believe period-to-period comparisons of our results of operations are not
necessarily a reliable indication of future performance. The fluctuations
have occurred as a result of shifts in our business strategy and acquisitions
of other companies which have affected our results of operations on a
consolidated basis. It is possible that our quarterly operating results from
time to time will be below the expectations of investors and public market
analysts. In that case, we expect that the price of our common stock will
drop.
Risks Related to Our Operations
We made a shift in our marketing approach in the fourth quarter of 2000
and we cannot be certain of future progress or profitability.
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During fiscal year 1999 and 2000 our marketing approach relied on seminar
marketing activities. Then in the fourth quarter of 2000 we discontinued our
seminars and focused on marketing our software products through resellers. As
a result, we had less revenues in the 2001 fiscal year, but we are slowly
gaining momentum with this new approach. We also have recorded losses since
our inception and currently are unable to satisfy certain of our obligations
through our generated revenues. Although it is possible that our operating
revenue will increase in the future based upon the recent increases in
quarterly revenues, we cannot guarantee that our revenues will grow or exceed
our operating expenses.
We are dependent on the efforts of two major resellers who may leave us
at any time.
During the three months ended March 31, 2002, approximately 41.0% and
7.9% of total net sales were derived from customers acquired through two of
our largest resellers. Our formal agreements with these resellers do not
prevent them from discontinuing their relationship with us. Our largest
reseller has indicated a desire to restructure the commission structure we
have with it. At this time, we are unsure how the change in commission
structure will affect our revenues. Also, the loss of these resellers,
without immediate replacement, may result in a drop in revenues which could
adversely affect our profit margin and potential future growth.
We are dependent upon the knowledge and skills of two members of our
management team who could leave us at anytime.
Our President, Christian R. Larsen, and our Vice President of
Engineering, Allan E. Oepping, possess particular knowledge of our software
technologies which is critical to our operations. We do not have employment
agreements with these individuals and they could leave us at anytime. Should
we lose the services of either or both of them, we may be unable to sustain
our current operations, we may experience delays in development of new
products, and/or we may not be able to service our customers in a satisfactory
manner.
We are subject to intense competition from large and small companies
which limits our ability to obtain market share.
We face competition in the overall Internet software market, as well as
in the web site building market. Our success in obtaining market share will
depend upon our ability to build name brand recognition and to provide
cost-effective products and services to our customers. We have developed our
products to meet the needs of small businesses and we believe the generality
of our competitors' services may be inadequately addressing our potential
customers' needs. We expect competition to persist, increase, and intensify in
the future as the markets for our products and services continue to develop
and as additional competitors enter our market. In addition, many of our
current or potential competitors have broad distribution channels that they
may use to bundle competing products directly to end-users or purchasers. If
these competitors were to bundle competing products for their customers, it
could adversely affect our ability to obtain market share and may force our
prices down.
We may be unable to achieve market acceptance because technological
standards for payment processing are not established.
Our ability to earn significant revenues from our Visual WebTools(TM) or
IntelliPay payment system will depend in part on their acceptance by a
substantial number of prominent online businesses. Broad acceptance of our
products and services and their use in large numbers is critical to our
success because a large portion of our revenues derive from one-time and
recurring fees we charge to customers buying our products and services. One
obstacle to widespread market acceptance for IntelliPay payment system is that
widely adopted technological standards for accepting and processing payments
over the Internet have not yet emerged. As a result, merchants and financial
institutions have been slow to select which service to use. Until one or more
dominant standards emerge, we must design, develop, test, introduce and
support new services to meet changing customer needs and respond to other
technological developments. To be successful, we must obtain widespread
acceptance of our technologies, or modify our products and services to meet
whatever industry standards do ultimately develop. It is
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not certain that we will be able to do either.
We depend upon our proprietary rights, none of which can be completely
safeguarded against infringement.
Our ability to compete effectively will depend, in part, upon our ability
to protect our proprietary source code, Visual WebTools(TM) and the IntelliPay
payment system, through a combination of licenses and trade secrets.
Intellectual property rights, by their nature, are uncertain and involve
complex legal and factual questions.
We rely upon trade secrets with respect to our source code and functionalities
and other unpatented proprietary information in our product development
activities. We seek to protect trade secrets and proprietary knowledge in
part through confidentiality agreements with our employees, resellers, and
collaborators. These agreements may not effectively prevent disclosure of our
confidential information and may not provide us with an adequate remedy in the
event of unauthorized disclosure of such information.
If employees or collaborators develop products independently that may be
applicable to our products under development, disputes may arise about
ownership of proprietary rights to those products or services. Protracted and
costly litigation could be necessary to enforce and determine the scope of our
proprietary rights. It would be impossible to predict whether litigation
might be successful.
We rely in part on third party technology licenses which we cannot
guarantee will be available to us in the future.
We rely on certain technology which we license from third parties,
including software which is integrated with internally developed software and
used in our software to perform key functions. We cannot ensure that third
party technology licenses will continue to be available to us on commercially
reasonable terms, or at all. Our inability to maintain any of these
technology licenses could result in delays in distribution of our services or
increased costs of our products and services.
We may need additional external capital and may be unable to raise it.
Based on our current growth plan we believe we may require $1 to $2
million additional financing within the next twelve months to remain
competitive in our market. Our success will depend upon our ability to access
equity capital markets and borrow on terms that are financially advantageous
to us. Also, we may not be able to obtain additional funds on acceptable
terms. If we fail to obtain funds on acceptable terms, then we might be
forced to delay or abandon some or all of our business plans. If we are
unable to obtain additional capital, then we may not have sufficient working
capital to develop products, finance acquisitions, or pursue business
opportunities. If we borrow funds, we could be forced to use a large portion
of our cash reserves to repay principal and interest on those funds. If we
issue our securities for capital, the interests of investors and shareholders
could be diluted.
We must update our products and services and may experience increased
costs and delays which could reduce operating profit.
The electronic commerce, web hosting and merchant processing markets in
which we compete are characterized by technological change, new product
introductions, evolving industry standards and changing customer needs. In
order to remain competitive, we may be required to engage in a number of
research and development projects, which carries the risks associated with any
research and development effort, including cost overruns, delays in delivery
and performance problems. Any delay in the delivery of new products or
services could render them less desirable by our customers, or possibly even
obsolete. Any performance problem with a new product or service may require
significant funds to correct the problem. As a result of these factors, our
research and development efforts could result in increased costs that could
reduce our operating profit, a loss of revenue if promised new products are
not timely delivered to our customers, or a loss of revenue or possible claims
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for damages if new products and services do not perform as anticipated.
We may experience software defects which may damage customer relations.
Despite rigorous testing, our software may nevertheless contain
undetected bugs, errors or experience failures when introduced, or when the
volume of services provided increases. Any material errors could damage the
reputation of our service or software, as well as damage our customer
relations. We have detected errors, defects, and bugs in the past and have
corrected them as quickly as possible. Correcting any defects or bugs we may
discover in the future may require us to make significant expenditures of
capital and other resources. We believe that we follow industry-standard
practices relating to the identification and resolution of errors, defects, or
bugs encountered in the development of new software and in the enhancement of
existing features in our products. As of this date we have not experienced
any material adverse effect by reason of an error, defect, or bug.
We may experience breakdowns in our hosting services, infrastructure or
payment processing systems, which may expose us to liabilities and cause
customers to abandon our products and services.
We would be unable to deliver our payment processing services or hosting
services if our system infrastructures break down or are otherwise
interrupted. Events that could cause system interruptions are:
. fire,
. earthquake,
. power loss,
. terrorist attacks,
. telecommunications failure, and
. unauthorized entry or other events.
Although we regularly back up data from operations, and take other
measures to protect against loss of data, there is still some risk of such
losses.
Despite the security measures we maintain, our infrastructure may be
vulnerable to computer viruses, hackers, rouge employees or similar sources of
disruption. Any problem of this nature could result in significant liability
to customers or financial institutions and also may deter potential customers
from using our services. We attempt to limit this sort of liability through
back-up systems, contractual provisions, insurance, and other security
measures. However, we cannot assure you that these contractual limitations on
liability would be enforceable, or that our insurance coverage would be
adequate to cover any liabilities we might sustain.
Also, a breach of our e-commerce security measures could reduce demand
for our services. The e-commerce industry is intensely focused on the need
for Internet security, particularly with respect to the transmission and
storage of confidential personal and financial data. Any compromise or
elimination of our security could erode customer confidence in our systems and
could result in lower demand for our services or possible litigation.
We are dependent upon license renewal which cannot be assured to occur.
We derive revenues from user licenses and license renewals on a month to
month arrangement. We also intend to increase the brand recognition of our
products among users through these types of relationships. In the event that
a substantial number of our customers were to decline to renew their contracts
for any reason, we could experience a substantial drop in revenues. Our
success in establishing our products as a recognized brand name and achieving
their acceptance in the market will depend in part on our ability to
continually engineer and deliver new product technologies and superior
customer service, so that customers renew their licenses month to month.
We may pursue acquisitions of complementary service product lines,
technologies or business which may interfere with our operations and
negatively affect our financial position.
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From time to time, we evaluate potential acquisitions of businesses,
services, products, or technologies. These acquisitions may result in a
potentially dilutive issuance of equity securities, the incurrence of debt and
contingent liabilities, and amortization of expenses related to goodwill and
other intangible assets. In addition, acquisitions involve numerous risks,
including difficulties in the assimilation of the operations, technologies,
services, and products of the acquired companies; the diversion of
management's attention from other business concerns; risks of entering markets
in which we have no or limited direct prior experience; and, the potential
loss of key employees of the acquired company. As of the date of this filing,
we have no present commitment or agreement with respect to any material
acquisition of other businesses, services, products, or technologies.
The Internet is subject to rapid technological change and we may not be
able to keep pace.
If wide scale implementation of a new technology or payment method occurs
on the Internet, then we may lose revenues or be unable to afford to make
necessary adaptations. Changes in payment methods, such as stored-value
cards, electronic cash equivalents or wireless communications, could force us
to modify our payment services or software to remain competitive, and could
potentially render one or more of our services or products obsolete. Risks
exist that we may not be able to successfully develop new products or, if we
do, that those products may not be accepted by the market.
We may be subject to increased regulations which may increase our costs
of operations and may be exposed to liability for information retrieved
from the Internet.
Other than the laws and regulations applicable to businesses generally,
we are aware of few laws and regulations which expressly apply to access and
commerce on the Internet. Due to the increased popularity and use of the
Internet, however, it is possible that new laws and regulations may be adopted
with respect to the Internet relating to issues such as user privacy, taxes,
pricing and characteristics, and content and quality of products and services.
The adoption of any new laws or regulations could retard the growth or the use
of the Internet, which could adversely affect the demand for our products and
services. New laws or regulations could also result in significant additional
costs and technological challenges for us in complying with any mandatory
requirements. Further, several states have attempted to tax online retailers
and service providers, even when those parties have no physical presence in
the state. In addition, plaintiffs have brought claims, and sometimes
obtained judgments, against online service providers for defamation,
negligence, copyright or trademark infringement, or under other theories with
respect to materials disseminated through the Internet. We may be subject to
similar claims.
This prospectus contains forward-looking statements and you should not
place undue reliance on these forward-looking statements.
We intend to identify forward-looking statements in this prospectus using
words such as "believes," "intends," "expects," "may," will," "should,"
"plan," "projected," "contemplates," "anticipates," or similar statements.
These statements are based on our beliefs, as well as assumptions we made
using information currently available to us. Because these statements reflect
our current views concerning future events, these statements involve risks,
uncertainties and assumptions. Actual future results may differ significantly
from the results discussed in the forward-looking statements. Some, but not
all, of the factors that may cause these differences include those discussed
in this Risk Factors section, which apply only as of the date of this
prospectus.
USE OF PROCEEDS
We are registering the shares for the benefit of the selling stockholders
and they will sell the shares from time to time under this prospectus. We
will not receive the proceeds from the shares sold by the selling
stockholders. We will pay the costs of this offering with the exception of
the costs incurred by the selling stockholders for their legal counsel and the
costs they may incur for brokerage commissions on the sale of their shares.
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MARKET FOR COMMON EQUITY
Market Information
The principal market for our common stock is the NASD OTC Bulletin Board
and our common shares are traded over the counter under the symbol "PWEB."
The following table presents the range of the high and low bid prices of our
stock as reported by the Nasdaq Trading and Market Services. Such quotations
represent prices between dealers and may not include retail markups,
markdowns, or commissions and may not necessarily represent actual
transactions.
Year Quarter Ended High Bid Low Bid
----- -------------- --------- -------
2000 March 31 $ 6.13 $ 2.31
June 30 4.75 2.13
September 30 3.50 1.63
December 31 3.34 0.59
2001 March 31 $ 1.45 $ 0.69
June 30 0.92 0.26
September 30 0.46 0.23
December 31 0.78 0.20
2002 March 31 $ 0.51 $ 0.18
Our shares are subject to Section 15(g) and Rule 15g-9 of the Securities
and Exchange Act, commonly referred to as the "penny stock" rule. The rule
defines penny stock to be any equity security that has a market price less
than $5.00 per share, subject to certain exceptions. The rule provides that
any equity security is considered to be a penny stock unless that security is:
registered and traded on a national securities exchange meeting specified
criteria set by the SEC; authorized for quotation from the NASDAQ stock
market; issued by a registered investment company; excluded from the
definition on the basis of price at least $5.00 per share or the issuer's
net tangible assets. If our shares are deemed to be a penny stock, trading in
the shares will be subject to additional sales practice requirements on
broker-dealers who sell penny stocks to persons other than established
customers and accredited investors. Accredited investors, in general, include
certain institutional investors and individuals with assets in excess of
$1,000,000 or annual income exceeding $200,000 or $300,000 together with their
spouse.
For transactions covered by these rules, broker-dealers must make a
special suitability determination for the purchase of our securities and must
have received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, the
rules require the delivery, prior to the first transaction, of a risk
disclosure document relating to the penny stock. A broker-dealer also must
disclose the commissions payable to both the broker-dealer and the registered
representative, and current quotations for the security. Finally, monthly
statements must be sent disclosing recent price information for the penny
stocks. Consequently, these rules may restrict the ability of broker-dealers
to trade or maintain a market in our common stock and may affect the ability
of shareholders to sell their shares.
Holders - As of May 23, 2002, we had approximately 329 stockholders of
record of our common stock.
Dividends - We have not paid cash or stock dividends and have no present
plan to pay any dividends. Instead, we intend to retain any earnings to
finance the operation and expansion of our business. We are not presently
subject to any restriction on our present or future ability to pay any
dividends, but the payment of any cash dividends on our common stock is
unlikely. However, our Board of Directors may revisit this matter from time
to time and may determine our earnings, financial condition, capital
requirements and other factors allow for the payment of dividends.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
Beginning in the second quarter of 2000, and continuing throughout the
2001 fiscal year management took several steps to restructure our operations
with the intent to generate profits. These steps included integration of the
operations of Pacific WebWorks and its related companies, reduction in the
number of employees, and continued development of our sales and marketing
channels. For the three month period ended March 31, 2002, we recorded net
earnings of $253,863; however, we recorded net losses for the past two fiscal
years and operating losses since inception. We are able to support our
recurring day-to-day cash operation expenses with recurring cash inflows, but
we are dependent on a few significant resellers, who were responsible for
approximately 48.9% of our first quarter revenues. Certain capital leases are
in default in one of our development stage subsidiaries and one subsidiary
recently defaulted on its operating lease. Also, we have negative working
capital of $945,123 as of March 31, 2002, and are unable to satisfy our
current liabilities with cash on hand and must negotiate with our creditors.
Acquisition Treatment
On April 4, 2000 we completed the acquisition of IntelliPay, Inc., a
Delaware corporation, as a wholly-owned subsidiary. In an arms length
transaction, Pacific WebWorks issued 2,400,000 common shares, valued at
$4,320,000, in a stock-for-stock exchange for 1,000 shares of IntelliPay. The
acquisition was accounted for under the purchase method of accounting.
Accordingly, IntelliPay's results of operation have been included with Pacific
WebWorks from the closing date in April 2000 and its consolidated assets and
liabilities have been recorded at their fair values on the same date.
Pacific WebWorks and U.S. Merchant Systems, Inc., a major customer during
fiscal year 1999, formed World Commerce Network, LLC, in December of 1999 as a
joint venture. Originally, we held a 50% interest in World Commerce, which
was held on the equity method of accounting. In March 2000 we acquired an
additional 1% interest in World Commerce for 4,663 shares of Pacific WebWorks
common stock valued at $9,180, which then gave us a 51% total interest. In
the third quarter of 2000, we determined that we would acquire the remaining
49% of World Commerce. We and U.S. Merchant Systems agreed to complete our
scheduled seminars and then we would assume the outstanding ownership of World
Commerce held by US Merchant Systems and continue forward with World Commerce
operations. As a result, we acquired the remaining 49% interest for $100 in
August 2000. The operations of World Commerce are consolidated with our
financials statements as a wholly-owned subsidiary of Pacific WebWorks. World
Commerce ceased seminar operations in June 2000.
In February 2001 we completed the acquisition of Logio, Inc., a Nevada
corporation. We acquired Logio in an arms length transaction by issuing
approximately 2.8 million shares of our common stock for 18,425,830 shares of
Logio common stock. This transaction was valued at approximately $2,450,000.
Goodwill of $1,855,388 began to be amortized over three years in 2001 and was
reduced to zero for an impairment charge in the second quarter of 2001. The
acquisition was accounted for under the purchase method of accounting using
generally accepted accounting principles. Logio's results of operations are
included with our own from the closing date and its consolidated assets and
liabilities are recorded at their fair values at the same date. Logio has
ceased development of its products due to funding and market constraints.
Results of Operations.
The following discussions are based on consolidated financial statements
of Pacific WebWorks and its subsidiaries, IntelliPay, Logio and World
Commerce, for the three month periods ended March 31, 2002 and 2001 and the
years ended December 31, 2001 and 2000.
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Comparison of Three Month Periods Ended March 31, 2001 and 2000.
Net revenues. We receive revenues primarily from the sale of access to
our software technology and continuing monthly service and hosting fees.
Additionally, we derive revenues for services provided related to web site
design, training, education and consulting. Revenues are recognized when
persuasive evidence of an agreement exists, delivery has occurred and services
have been rendered, the price is fixed or determined and collectability is
reasonably assured. Up-front fees are non-refundable and are deferred and
recognized systematically over the period the product is delivered and
services are performed, which is generally one year. Monthly fees for our
services are recognized as services are performed. Revenues decreased
$797,992 for the 2002 first quarter compared to the 2001 first quarter
primarily as a result of our shift from seminar marketing to business
development and reseller distribution in late 2000. This shift resulted in a
decrease in sales of software access and license fees which were deferred.
Cost of sales and gross profits. These costs include costs of merchant
accounts, fulfillment, reseller fees and other third party products and
services. Cost of sales decreased $112,926 for the 2002 first quarter
compared to the 2001 first quarter. The cost of sales decrease in the 2002
year was primarily related to personnel reductions and streamlined operations.
Gross profits decreased $685,066 for the 2002 first quarter compared to the
2001 first quarter due to decreased revenues in the 2002 first quarter as a
result of our shift in marketing strategy.
Total operating expenses. Total operating expenses decreased $955,431 in
the 2002 first quarter compared to the 2001 first quarter. The decrease was
primarily the result of decreases in selling expenses, research and
development, general and administrative expenses and depreciation and
amortization expenses. Management reduced these expenses through personnel
reductions, the elimination of costly seminars and the relocation of our
offices.
Selling expenses. Selling expenses consist of both sales and marketing
expenses, including department salaries and benefits, advertising, and other
related expenses. Our selling expenses decreased $123,211 for the 2002 first
quarter compared to the 2001 first quarter. The decrease in selling expenses
occurred due to a reduction in work force from as many as twelve employees in
the 2001 first quarter to as few as six in the 2002 first quarter
Research and development expenses. Research and development consists
primarily of personnel expenses related to product design, programming, and
quality control. Research and development expenses decreased $65,860 in the
2002 first quarter compared to the 2001 first quarter. The decrease resulted
primarily from a reduction in personnel from as many as eight employees in the
2001 first quarter to as few as four during the 2002 first quarter.
General and administrative expense. General and administrative expenses
consist of all finance and administrative and finance salaries and benefits,
rental of office space, professional fees and other general office expenses.
General and administrative expenses decreased $154,656 for the 2002 first
quarter compared to the 2001 first quarter. The decreases were due to
reduction in personnel, automation of certain administrative and financial
processes, discontinuation of investor relations in foreign markets and moving
our offices to a less expensive office building.
Depreciation and amortization. These expenses include depreciation of
property and equipment and amortization of goodwill and other assets. These
expenses decreased $519,887 in the 2002 first quarter compared to the 2001
first quarter due to the impairment of certain long-lived assets of Logio
during 2001.
Compensation expense for options and warrants. These expenses relate to
warrants granted to consultants in 2001, which expire through April 2006. For
the 2002 first quarter we recognized $43,768 of compensation expense related
to these warrants which represents the fair market value of the warrants
earned.
Impairment loss. As a result of certain events and management's
assessment of impaired assets, we
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recorded $122,685 in losses related to impairment of long-lived assets in
Logio for the first quarter ended March 31, 2001. We did not recognize any
impairment losses for the 2002 first quarter. The 2001 first quarter
impairments related to defaults of capital leases and return of equipment to
vendors by Logio.
Total other income (expense). Total other expenses decreased $5,508 for
the 2002 first quarter compared to the 2001 first quarter. Penalties and
interest for IntelliPay's estimated past due payroll taxes were the primary
components of other expenses for the 2002 first quarter. The reduction in
interest expense was due to the settlement and forgiveness in January 2002 of
a note payable and the repayment of approximately $1,200,000 in debt in July
2001.
Net income (loss). We recorded net income of $253,863 for the 2002 first
quarter primarily due to an extraordinary gain of $416,263 related to the
settlement, release and forgiveness of liabilities owed by World Commerce
Network. For the 2001 first quarter we recorded a net loss of $438,273. We
recorded net earnings per common share of $0.01 for the first quarter ended
March 31, 2002 compared to a net loss per common share of $0.03 for the first
quarter ended March 31, 2001
Comparison of 2001 and 2000 Year End Periods. Following is a comparison
of our operating results for the year ended December 31, 2001 with the year
ended December 31, 2000:
Net revenues. Net revenues decreased $1,855,205 for the year ended
December 31, 2001, compared to the 2000 fiscal year. The decrease for the
2001 year was primarily the result of discontinued seminar marketing in late
2000, which resulted in a decrease in sales of software, access and license
fees as deferred. We expect the sales for software, access and license fees
to continue to decrease through 2002 as compared to 2001 as a result of our
new sales and distribution plan, which emphasizes the growth of recurring
hosting and IntelliPay payment system revenues
Cost of sales and gross profits. These include costs of merchant
accounts and fulfillment costs, reseller fees and other third party products
and services. Cost of sales decreased $267,885 for the 2001 year compared to
the 2000 year. The cost of sales decrease in the 2001 year was primarily
related to personnel reductions, from as many as 13 in 2000 to as few as five
during 2001, and streamlined operations. Gross profits decreased $1,587,320
for the 2001 year compared to the 2000 year due to decreased revenues in 2001
from the initial sales of our software, access and license fees which had
lower costs of sales and larger selling expenses in 2000.
Total operating expenses. Total operating expenses decreased $1,908,594
in the 2001 year compared to the 2000 year. The decrease was primarily the
result of decreases in selling expenses, research and development and general
and administrative expenses. Management reduced these expenses through
personnel reductions, pay cuts, the elimination of costly seminars and the
relocation of our offices. However, the decrease in operating expenses was
offset by compensation expense attributed to options and warrants earned by
employees, directors and consultants, along with impairment losses, which are
discussed below.
Selling expenses. Selling expenses consist of both sales and marketing
expenses, including department salaries and benefits, advertising, seminar
costs in 2000 and commissions. Our selling expenses decreased $4,209,617 for
the year ended December 31, 2001 compared to the 2000 year. The decrease in
selling expenses occurred due to discontinuing our seminar marketing program,
management in this department taking pay cuts of approximately 37.5% and a
reduction in personnel in this department from as many as 15 in 2000 to as few
as five employees in 2001. The cessation of the seminar marketing program
eliminated printing and mailing costs, travel expenses, show crew costs, hotel
ballroom rental and other costs associated with the seminars. Our sales
efforts since the fourth quarter of 2000 have been primarily focused on
business development and strategic alliance with large distributors of our
products and services.
Research and development expenses. Research and development consists
primarily of personnel expenses related to product design, programming, and
quality control. Research and development expenses decreased
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$595,519 compared to the 2000 year. The decrease resulted primarily from
personnel reductions from as many as 17 engineers in 2000 to as few as three
engineers in 2001.
General and administrative expense. General and administrative expenses
consist of all finance and administrative and finance salaries and benefits,
rental of office space, professional fees and other general office expenses.
General and administrative expenses decreased $803,771 for the 2001 year
compared to the 2000 year. The decreases were due to management taking pay
cuts of approximately 12.5% in 2001, implementation of a temporary raise
freeze, reduction in personnel from as many as nine in the 2000 year compared
to as few as six in 2001, limits placed on travel, automation of certain
administrative and financial processes and moving our offices to a less
expensive office building.
Depreciation and amortization. These expenses include depreciation of
property and equipment and amortization of goodwill and other assets. These
expenses increased $807,830 in the 2001 year compared to the 2000 year due to
the property and equipment increases from the consolidation of Logio's
operations beginning in February 2000. Additional increases were caused from
the amortization of Logio goodwill from February 2001 to June 2001 when the
asset was impaired.
Compensation expense for options and warrants. These expenses relate to
stock options earned by employees, directors and consultants. We granted
options to employees in September 2000 and the strike price of these options
was less than the fair value on the date of grant, creating intrinsic value.
We recognized the expense of these options over the one-year vesting period
and recorded $38,700 for the 2001 year. Included in the 2001 year is the
recognition of $116,715 of compensation expense related to the fair value over
the period earned of one million warrants granted to a consultant and $77,134
of expense related to the fair value of warrants issued in conjunction with
completion of our Unit Purchase Agreement with investors in July 2001.
Impairment loss. As a result of certain events and management's
assessment of impaired assets, we recorded $911,532 in losses related to
impairment of long-lived assets in Logio and $1,776,768 in losses related to
impairment of goodwill for Logio and World Commerce for the year ended
December 31, 2001.
Total other income (expense). Total other expenses increased $106,776
for the 2001 year compared to the 2000 year. Interest expense related to $1.2
million in notes payable and losses on the sale or abandonment of assets
related to Logio were the primary reasons for the increase in 2001.
Net Loss. Our net loss decreased $214,498 in the 2001 year compared to
the 2000 year. The net loss decrease is primarily the result of management's
steps to shift our business model away from costly seminar activities to a
focus on client acquisition for monthly hosting and maintenance fee revenues.
However, the impairment losses during 2001 reduced the overall effects of the
cost reductions on the income statement. The reduction for 2001 is partially
offset by the large reduction in sales recognized from software and access
and license fees due to our shift from a sales and distribution model to a
model that emphasizes growth in our monthly hosting and IntelliPay transaction
revenues. We expect similar results in 2002. We recorded a net loss per
common share of $0.24 for the year ended December 31, 2001 compared to $0.40
for the year ended December 31, 2000.
Liquidity and Capital Resources
As a result of our marketing and sales strategies shifting away from
costly seminars to business development during late 2000, our monthly cash
inflow decreased substantially during the 2001 year. During the 2001 fiscal
year, we took steps to reduce our burn rate in order to meet our monthly cash
requirements from operations. This has been accomplished through a reduction
in personnel, relocation to lower-cost office facilities and other expense
reduction activities. As of the first quarter 2002 we are meeting our
operational and cash flow goals; however, we must address our liabilities
through further negotiation and payments. We have consolidated payables past
due and accrued liabilities that, cumulatively, cannot be paid with cash on
hand or with recurring
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monthly cash flows. Thus, we may require additional funding sources to meet
the requirements on our existing liabilities and the liabilities of our
subsidiaries. We expect to continue to generate positive cash flows through
further development of business and sales.
At March 31, 2002, we had $327,981 cash and cash equivalents compared to
$249,813 as of December 31, 2001. Total current assets at March 31, 2002,
were $520,187 compared to $541,096 at the 2001 year end. Total current
liabilities were $1,465,310 at March 31, 2002, compared to $1,878,986 at the
2001 year end. Our accumulated deficit totaled $12,837,773 at the end of the
2002 first quarter compared to $13,091,636 at the 2001 year end. Net cash
provided by operating activities for the first quarter was $49,431. Net cash
used in investing activities for the 2002 first quarter was $11,078, which was
primarily for the purchase of operational equipment. Net cash provided by
financing activities was $39,815, which was primarily the result of a $40,000
stock subscription related to the purchase of our common stock.
Our commitments consist primarily of an operating lease for our Salt Lake
City office, which totals $5,300 per month as of March 31, 2002. In February
2002, in an effort to improve operational efficiencies, we closed IntelliPay's
physical office located in Fremont, California. In May 2002 IntelliPay
defaulted on its operating lease, which requires $5,650 per month through
December 2003. As of the date of this filing, we have moved IntelliPay's
technological infrastructure to Salt Lake City, Utah. Management anticipates
that this consolidation will provide considerable savings by eliminating
duplicative operational expenses.
Our total current liabilities as of March 31, 2002, reflect primarily
accounts payable, accrued liabilities, payables past due and capital leases in
default. As a result, we are working through various matters related to
liabilities and disputes with vendors and other creditors which may affect our
cash position. Management intends to negotiate resolutions for these
liabilities and disputes.
A portion of our total consolidated current liabilities at the 2002
first quarter was $287,513 of accrued liabilities primarily related to payroll
liabilities, interest payables, and reseller commissions. Payroll liabilities
of $90,600 were recognized which relate to estimated tax, penalties and
interest past due from IntelliPay for the period prior to and immediately
after its acquisition by Pacific WebWorks.
Our consolidated liabilities also consist of estimated returns and charge
backs from a leasing company that funded customer purchases and placed these
customers on a payment plan during 2000. These returns and charge backs were
related to the seminar marketing activities of World Commerce, which
management discontinued in late 2000. World Commerce owed an estimated
$157,000 for recourse on lease funding for customers who fell into default on
their payment plans. These charge backs, returns and refunds are estimated at
$225,000 at the end of the 2002 first quarter. World Commerce also had
approximately $64,000 in other payables and payables past due as of March 31,
2002.
Capital leases in default also represent a portion of our consolidated
liabilities. Prior to our acquisition of Logio, its management had
temporarily ceased its corporate development and operations of its Internet
products. As a result, it was unable to make payment on some of its capital
lease obligations. It defaulted on a licensing agreement with Oracle
Corporation and capital lease agreements with Sun Microsystems Finance. The
default on these capital lease agreements totaled approximately $439,000,
resulting in an impairment loss on a consolidated basis of $911,532. In
addition, as of March 31, 2002, Logio had approximately $214,000 in past due
payables.
Historically, we have financed our operations by revenues, loans and
sales of our common stock. In prior years we had relied on loans for
additional funding and during fiscal year 2000 we entered into agreements with
the holders of a majority of our debt to convert those debts into equity.
During the first and second quarter of 2001, we borrowed an additional
$950,000 resulting in a total of $1.2 million of outstanding debt with accrued
interest, which was due and payable to various parties.
In May 2001 we entered into a unit purchase agreement with four
accredited investors to sell 4,000,000
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units for $1,600,000. Each unit consisted of one common share and a warrant
to purchase one common share at an exercise price of $0.80. Pursuant to the
agreement, the shares issued in the private placement were placed in escrow
and the $1.6 million was also placed in escrow. Three of the investors
assumed our $1.2 million of outstanding debt taking new notes payable, with
15% interest, and payable on the earlier of September 20, 2001, or at such
time as we received up to $1 million in equity financing. These notes payable
were also placed in the escrow. Subsequently, in July 2001 $1.6 million was
released from the escrow which paid in full $1,214,000 of notes payable, with
interest, $10,000 was paid to the escrow agent and the remaining $376,000 was
funded to Pacific WebWorks.
Warrants granted as part of equity transactions may provide an additional
source of funding. As of June 10, 2002, we had outstanding warrants to
purchase 6,900,000 common shares which may result in maximum proceeds of
$7,975,000. However, the holders of the warrants have total discretion
whether or not to exercise the warrants and we cannot assure that all of the
warrants will be exercised before their expiration through April 2006.
While we may be able to fund a portion of our operations by revenues for
the short term, we currently anticipate using loans and private placements of
our common stock to fund operations and expansion over time. We have taken
steps to reduce our monthly burn rate and to become cash flow positive, but we
believe we may need an additional $1 to $2 million in 2002 to continue to keep
up with technological improvements and further our business development
strategies. We operate in a very competitive industry in which large amounts
of capital are required in order to continually develop and promote products.
Many of our competitors have significantly greater capital resources than we
do. We believe we will need to continue to raise additional capital, both
internally and externally, in order to successfully compete.
We intend to structure private placements of our common stock pursuant to
exemptions from the registration requirements provided by federal and state
securities laws. The purchasers and manner of issuance will be determined
according to our financial needs and the available exemptions. We also note
that if we issue more shares of our common stock our stockholders may
experience dilution in the value per share of their common stock.
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BUSINESS
Historical Development
We were incorporated as Asphalt Associates, Inc. in the state of Nevada
on May 18, 1987. Asphalt Associates never established commercial business
operations and on January 11, 1999, Asphalt Associates merged with Utah
WebWorks, Inc., a Utah corporation (the "Utah WebWorks"), which was
incorporated on April 10, 1997. Utah WebWorks owned a significant portion of
the software technology which we currently use, while Asphalt Associates held
approximately $1 million dollars in cash which could be used for the marketing
and improvement of the Utah WebWork's technology. In conjunction with the
merger, Asphalt Associates changed its name to Pacific WebWorks, Inc. The
shareholders of Asphalt Associates retained one-half of the issued and
outstanding capital stock of the merged corporation, while the shareholders of
Utah WebWorks acquired the remaining one-half of the issued and outstanding
capital stock of the merged corporation.
Pacific WebWorks made several acquisitions during the 2000 fiscal year,
which are discussed below and in the "Management's Discussion and Analysis,"
above. In April 2000, we acquired IntelliPay, Inc., a Delaware corporation,
as our wholly-owned subsidiary. Then in August of 2000 we completed the
acquisition of World Commerce Network, LLC. Our 2001 fiscal year began with
the acquisition, in February of 2001, of Logio, Inc. as our wholly-owned
subsidiary
IntelliPay. In April 2000 we acquired IntelliPay through a
stock-for-stock exchange. We had been working closely with IntelliPay for
about two years and during 1999 we entered into a joint venture with
IntelliPay to establish MainStreetSquare.com, an online shopping portal, which
has since been discontinued. IntelliPay specialized in providing online,
secure and real-time payment processing services for businesses of all sizes.
We refer to its products and services as the IntelliPay payment system.
IntelliPay's payment system allows a business to accept real time payments
from their web site, Internet appliances, kiosks, or storefront. IntelliPay's
systems use industry standard security components and methods, the same
standards used by all major commerce sites, and has been tested under strict
banking network procedures.
In December 2000 IntelliPay moved into corporate headquarters located in
Silicon Valley, California and upgraded its data center which increased its
processing capabilities. Then in February 2002, management decided to reduce
costs by moving the IntelliPay operations to our data center in Salt Lake
City, Utah.
World Commerce Network, LLC. World Commerce Network, LLC was created in
December 1999 as a marketing company. Its mission was to sell the products of
Pacific WebWorks, U.S. Merchant Systems and IntelliPay. From December 1999
through July 2000 World Commerce conducted seminars focused on small business
owners and home business Internet users. World Commerce sold products
including: Visual WebTools(TM), merchant accounts, the IntelliPay payment
system, as well as education and training. World Commerce ceased seminar
marketing as of July 2000. Management is evaluating the future role of World
Commerce since we now focus on direct sales and acquisition of reseller and
strategic alliance distribution channels.
Logio, Inc. On October 31, 2000, Pacific WebWorks and Logio entered into
an Agreement and Plan of Reorganization in which Pacific WebWorks agreed to
acquire Logio as a wholly-owned subsidiary through a stock-for-stock exchange.
Logio, formerly WordCruncher Internet Technologies, Inc., was a development
stage company historically engaged in the development and marketing of a
focused Internet directory and search engine designed to serve the needs of
the business professional. The acquisition was contingent upon the approval
of the stockholders of Logio and registration of the shares under the
Securities Act of 1933. The registration statement on Form S-4 was declared
effective on December 20, 2000, without review by the SEC, and Logio
stockholder approval was obtained in January 2001. We finalized the
acquisition on February 8, 2001 when we filed Articles of Exchange with the
state of Nevada. Due to funding constraints, Logio discontinued its web site
and operations.
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Our Business
Pacific WebWorks is an application service provider that develops
business software technologies for Internet merchants. We specialize in
turn-key applications allowing small- to medium-sized business owners to
expand their business onto the Internet. Our product family provides tools
for web site creation, management and maintenance; electronic business
storefront hosting and Internet payment systems for the small to medium-sized
business niche.
We initially focused entirely on virtual retailing software solutions,
meaning merchants that do not have a physical store location and would exist
only on the Internet. Due to requests in the marketplace, we expanded our
technologies to include features for small to medium-sized physical merchants
in addition to our virtual merchants. This is expected to give the merchant a
complete solution for all physical store and Internet concerns and at the same
time reduce costs of operations and introduce new profit centers for the
merchant.
Our Market
Based upon an informal review of our industry, we believe small business
spending in the United States on Internet service applications is forecasted
to grow from $197 million in 2000 to $1.5 billion in 2004, or about 200%
calculated average growth rate. This is about half of all small business
application service provider spending, and represents one of the last large
Internet business marketplaces with no established leader in place. The other
half of small business application service provider includes Internet
applications like e-mail.
Our informal review also indicated total United States spending by all
size companies to be forecasted to grow from $960 million in 2000 to $4.25
billion in 2004. Small companies, with fewer than 100 employees, but not
home-based businesses, represent about 70% of all forecasted application
service provider spending. We believe there are approximately two million
small businesses, including small office/home offices, in the United States,
with five million using the Internet. The number of small businesses on the
Internet is expected to grow to 25 million by 2005.
Products
Even though small business, including small office/home office, typically
understands how traditional brick and mortar businesses operate, we believe
they don't necessarily know how to replicate business processes effectively
and economically on the Internet. Pacific WebWorks assists small businesses
in succeeding online through our Visual WebTools(TM) software, the IntelliPay
payment systems and education.
We provide a comprehensive one-stop solution that incorporates an
integrated suite of e-commerce software tools, plus hosting, site management,
web design services, and education. By leveraging a shared commerce platform
across many customers, we bring economy of scale to our customers. We believe
this structure allows our customers to focus on their business instead of
technology, enabling them to achieve a much faster return on investments made
in technology and more success on the Internet.
Visual WebTools Version 4.1 ("V4.1") - V4.1 is a suite of software programs
that fit together to perform the basic business functions we believe are the
most effective on the Internet. The following products are included as part
of this suite.
... WebContacts - is a contact management program. Our customers can
maintain a list of their web site visitors if the visitor elects to
leave behind contact information. This allows our customers to use the
Internet to market to their customers. The program can also be used as
a database to store customer information that our customers acquire from
their customers. We believe our customers have potential to increase
sales if they can continue to communicate with their customers.
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... WebChannels - is an e-mail distribution program that enables our
customers to send customized e-mails to their WebContacts database of
subscribers.
... Web profiling tool - is a form and survey creation tool that helps
capture feedback and valuable demographic information from customers and
web site visitors. Our clients can create customizable forms, surveys
and interactive questionnaires. Web profiling tool includes a catalog of
pre-made questions or the client can create their own. For example, a
client could add support for online subscription services, such as
weekly newsletters, coupons and special deals.
... WebStats - enables our clients to watch what visitors to their web site
are doing. WebStats is a statistics program that provides detailed
reports on web site visitors including the path they take throughout the
web site. This enables our customers to learn what browsers and
operating systems web site visitors are using, what web pages generate
hits, and what pages are the most popular. WebStats can produce reports
of business information, including year-long sales trends and the
effectiveness of the clients' sites.
... WebWizard. - WebWizard is an easy-to-use web page design program that is
simple enough for the novice, yet powerful enough for web design
professionals. It incorporates sophisticated site components like
tables, frames and multimedia files in a straightforward, menu driven
process. No complicated programming is required. WebWizard allows our
customers to quickly and easily create, update, modify, and enhance
their web sites. Changes can be made 24 hours a day, 7 days a week from
any Internet-connected Windows PC. Changes are updated automatically
and placed online within minutes. Our customers can manipulate their
site's layout, colors, content, tables, and graphics easily. WebWizard
includes a library of hundreds of graphics which are freely accessible
by our clients.
... ClipOn Commerce(TM) - is an e-storefront and product management system,
complete with shopping cart technology. ClipOn Commerce allows our
clients to build an Internet storefront. They can create a complete
product catalog, organize and search products by unlimited categories
and import/export to and from their database. ClipOn Commerce has
support to include a merchant account and is integrated with our
IntelliPay payment system, which allows our clients to accept all major
credit cards. ClipOn Commerce also has support for QuickBooks
accounting software.
IntelliPay Payment System - This group of products offers payment technologies
for business-to-business and business-to-customer uses on the Internet and in
physical stores. They allow our customers to accept real time credit card
payments from their web site, Internet appliances, kiosks, or storefront. The
IntelliPay products use industry standard security components and methods, the
same standards used by all major commerce sites, and has been tested under
strict banking network procedures. Point-of-sale professionals provide
technical support and ePayment professionals can even help the business locate
an Internet-approved merchant account if needed. Once customers enter the
necessary data in a secure form, IntelliPay quickly processes the transaction
in real-time (2 - 5 seconds) and returns the customer back to the business
site. IntelliPay also provides methods for enterprise-level businesses to
link IntelliPay products, services and features into their ecommerce web sites
and port-live-data streams into back-office systems.
... ePayment System - IntelliPay supports all major card types including
Visa, MasterCard, American Express, Discover, Diners Club and JCB.
Also, support is provided for Visa and MasterCard debit (check) cards
and Level Two corporate/commercial cards through various bank networks.
Transaction types include industry standard transactions such as normal
authorizations, pre-authorizations intended for delayed settlement, the
so-called "force" allowing a transaction authorized offline (possibly a
voice authorization) to be settled, credits for refunds and IntelliPay
innovative address verification system, "AVS Only", allowing merchants
to retrieve an AVS score and verify the account validity.
In the first quarter of 2001, we released the duplicate payment
request detection and management system which enables online businesses
to configure the detection of and management of duplicate
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transaction requests from their ecommerce web site. Duplicate
transaction requests can be the result of an online shopper mistakenly
submitting the same purchase twice, but it can also be a source of
online fraud attempts in some cases.
This IntelliPay product allows our customers to control transaction
level behavior depending on AVS scores, duplicate transaction attempt
detection, and more. IntelliPay also automatically settles merchant
batches nightly so our customers are freed from forcing settlement via
manual or programmatic methods, which also helps reduce our customer's
costs by settling within the 24-hour window mandated by most merchant
accounts. The IntelliPay system is fully transportable meaning that a
customer can switch web site hosting companies, switch between most
by the selling stockholders. e-commerce software programs or switch to
or from almost any merchant account provider. Our system can follow our
customer at no additional charges and with minimal technology issues.
... ExpertLink(TM) - ExpertLink is IntelliPay's proprietary connection
protocol for high-volume Internet businesses requiring reliable, high
velocity real-time transaction authorizations linked to their own secure
web site and/or back office systems. ExpertLink is a standards-based
secure communications method allowing web-developers and application
developers to build in the ePayment processing and various features,
including batch management commands, duplicate transaction detection and
management, and more. Our customers usually purchase ExpertLink or
LinkSmart, and both come with Smart Terminal and the Secure Account
Management System.
... LinkSmart(TM) - LinkSmart gives our online customers the ePayment
features with minimized technical installation on their side. With
LinkSmart, our customer does not need to pay for installation and
maintenance of expensive secure servers since LinkSmart serves the
secure, customizable payment pages for them. LinkSmart offloads many
expensive mission-critical e-commerce tasks from the merchant. Using
SmartPages(TM) technology, which was released during the first quarter
2001, our client can upgrade and control the entire look and feel of the
IntelliPay hosted payment pages.
... Smart Terminal(TM) - Smart Terminal allows our customers to securely log
into their IntelliPay account from any Internet browser and authorize
manual transactions and orders they have received through email, voice,
fax or other offline methods. Smart Terminal supports industry-standard
transactions including normal authorizations, authorization-only for
delayed settlement, settlement for non-IntelliPay authorized
transactions, credits and more. Most clients receive Smart Terminal
along with LinkSmart or ExpertLink, but Smart Terminal can also be
purchased as a stand alone product.
... Secure Account Management System ("SAMS")- IntelliPay customers can
securely log into IntelliPay's Secure Account Management System from any
web browser to configure and control various IntelliPay components and
behaviors. They can manage today's authorized transaction batches,
control passwords, enforce transaction data components, control various
features such as our new duplicate transaction detection and management
system, control email transaction receipts, access Smart Terminal,
control LinkSmart payment page contents, target returning live data
streams, configure Visa-required invoice numbering, and more.
Education Services - We provide more than our software, we also assist our
customers with education and site design services. We believe this
information helps our clients understand how to use the Internet more
effectively.
... E-Camp - is a three-day training program designed to teach aspects of
doing business on the Internet.
... Idea Center - is our online Idea Center which promotes our customers'
success by providing them with current information related to the
Internet and what other successful business owners are doing online.
... Coaching Programs - are personalized electronic/telephonic instruction
on the use of our technology. These programs are directed towards
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assisting clients in making virtual operations successful. We recommend
eight to twelve, one-half hour sessions.
Rent-a-Pro - offers custom web site design services to clients who elect to
hire Pacific WebWorks to build their web site for them rather than building it
themselves.
Technical Support - is offered via online chat or e-mail from 7 a.m. to 8 p.m.
(MST), or by phone from 8 a.m. to 5 p.m. (MST).
Hosting Infrastructure - allows us to host our customers' web sites on behalf
of our clients, therefore eliminating the cost of ownership for our clients.
Place-to-Vacation - is a marketing tool that helps our users attract Internet
traffic to their web site by giving away a chance to win a free vacation.
Domain Names - are offered to customers online at retail prices. These
include ".com," ".org," ".biz," and ".info."
Sales and Marketing
We do not believe that our competitors are effectively targeting our
market niche: A totally Internet based, end-to-end business solution for
small- and medium-sized businesses. We believe that our products will allow
businesses to generate leads, sell products, run sales promotions, capture
demographic information about web site visitors, communicate with web site
visitors, and obtain intelligent information about who is visiting their web
sites and what they are doing while they are there. Our products allow our
customers to stay in complete control of their web sites and provide tools
which can facilitate a successful Internet experience for them.
We market and sell our products through reseller channels, our internal
sales force and strategic partnerships. We sell our products to partners at
wholesale, who then mark the products up and sell them at retail. We also
sell our products through resellers who are paid a commission for each
merchant who purchases our products. Each merchant must sign a purchase
agreement with the reseller, which the reseller must in turn provide to us. We
then provide software to the resellers' own merchants which allows these users
to create Internet web sites and/or complete e-business solutions. We provide
the initial reseller with training in the use of the software. The reseller
is an independent contractor and is obligated to pay the amounts due under the
agreement even if payments from the merchant are not received.
We believe we may be able to develop a substantial presence in our target
market through a combination of broad channels of distribution, marketing
strategy, unique proprietary technology, technical expertise, and early entry
into our target market. It is our opinion that in the past, businesses which
have attempted to maintain interactive web sites and conduct business on the
Internet have either developed technical expertise themselves, paid employees
to create and maintain their web sites, or retained contract "web
professionals" to do so. We believe our products allow small businesses, at a
relatively small cost, to participate in Internet commerce by creating and
managing their own Internet web sites and storefronts.
Trademark, Licenses and Intellectual Property
On October 9, 1998, Utah WebWorks filed a trademark application for
Visual WebTools(TM) which we acquired and became responsible for upon our
merger with Utah WebWorks. In December of 1998 the United States Patent and
Trademark Office assigned Serial No. 567,136 to this mark. The trademark is
currently pending. In 1999 we filed a trademark application for
MainStreetSquare.com(TM), Cyberhaggle(TM), and Pricehunter(TM), all features
of the online mall. Likewise, in 1999 we filed for trademarks on Pacific
WebWorks(TM), ClipOn Commerce(TM), FreeSiteNow(TM), V4(TM), Overnet
Express(TM) and IDDS(TM). We did not file any trademark applications during
fiscal year 2000 or 2001.
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Our success will depend, in part, on our ability to obtain and protect
our trademark and trade secrets and operate without infringing upon the
proprietary rights of others in the United States and other countries. If we
were to become involved in a dispute regarding our intellectual property, it
may become necessary for us to participate in interference proceedings before
the United States Patent and Trademark Office to determine whether we have a
valid claim to the rights involved. We could also be forced to seek a
judicial determination concerning the rights in question. These proceedings
could be costly and time consuming, even if we were to eventually prevail.
Should we not prevail, we could be forced to pay significant damages, obtain a
license to the technology in question, or stop marketing one or more of our
products.
All of our core technology was developed internally by either our
engineers or by the engineers of Utah WebWorks. The performance of our
products does not primarily rely on any third party technology, although we
continue to support as many third party technologies as possible.
We also rely upon trade secrets, proprietary know-how, and
confidentiality provisions in agreements with employees, consultants, and
resellers to protect our intellectual property rights. There are risks that
these other parties may not comply with the terms of their agreements with us,
and that we may not be able to adequately enforce our rights against these
parties. We have adopted a policy of requiring our employees and resellers to
execute confidentiality agreements when they commence employment with us or
resell our products. These agreements generally provide that all confidential
information developed or made known to the employees or resellers during the
course of their relationship with us is to be kept confidential and not
disclosed to third parties, except under certain specific circumstances. In
the case of employees, the agreements also provide that all inventions
conceived by the employees in the course of their employment will be our
exclusive property.
Major Customers
Our client base includes approximately 15,000 customer accounts, but two
major resellers accounted for approximately 41.0% and 7.9% of our total net
sales for the three months ended March 31, 2002. For the year ended December
31, 2001, these resellers represented 12.2% and 10.7% of net revenues. During
the 2000 fiscal year, three major resellers accounted for 40%, 20% and 17% of
the total number of our hosting customer base. We are dependent upon these
resellers and if we lose them then our revenues would be adversely affected.
Competition
Our market is relatively new, very competitive and subject to rapid
technological change. We expect competition to persist, increase, and
intensify in the future as the markets for our products and services continue
to develop and as additional companies enter our markets. A number of
companies are now providing Internet services to small businesses. They
include organizations like Microsoft, vJungle, Bigstep.com, Websitepros,
Agillion, Bizfinity, Vista.com, an HostPro. Our success in our target market
will depend upon our ability to build name brand recognition and to provide
cost-effective products and services to our customers.
At the present time, we have not identified any other companies that are
using the same approach as Pacific WebWorks. Nonetheless, there is always the
potential that other, larger interests will choose to enter the market we are
developing or that a new market may emerge. Although we feel the market is
vast and should accommodate many technology providers, we may not be able to
compete effectively with current and future competitors.
Currently, in our estimation, few major competitors offer products
comparable to the Visual WebTools(TM) product family. We believe that "Yahoo!
Store" is our most significant competitor, with its brand name recognition and
significantly greater financial, technical, marketing, and managerial
resources. Yahoo! Store has significantly higher sales and customers than we
do and has entered into a significantly higher number of license agreements
with third parties. We believe that our product provides a comparable service
for a lower price than that provided by Yahoo! Store. In addition, because we
have focused our efforts on small businesses, including
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providing Internet tools which allow businesses to develop their own Web
sites, we believe that the generality of the Yahoo! Store may be inadequately
addressing potential customer needs and that we will be able to address their
site development needs.
Our ability to successfully compete, in turn, will depend upon a number
of factors, including:
. our ability to successfully maintain and sell existing products;
. our ability to conceive, develop, improve, and market new products;
. our ability to identify and take advantage of emerging
technological trends within our target markets; and,
. our ability to respond effectively to technological changes or new
product announcements by competitors.
We believe that we will need to make significant expenditures for research and
development in the future to compete effectively.
Product Development
We continue to improve upon our products and release new related
products. We recorded research and development expenses of $143,095 for the
quarter ended March 31, 2002. At December 31, 2001, we recorded research and
development expenses of $449,323, primarily related to development of Visual
WebTools V4.1 and updating of core products. In 2000 we expended $1,044,842
for research and development for completion of our earlier V4 version of
Visual WebTools(TM).
Material Contracts
We are a party to the following material contracts:
We initially entered into an informal agreement with Electric Lightwave,
Inc. for telecommunications and Internet access in January 1998. We
formalized the agreement in February 1998 and negotiated an extension in
November 2001. The extension agreement is dated January 1, 2002, requires
that we pay approximately $3,250 per month for a dedicated DS3 Internet
connection and the extension terminates in January 2004.
In February of 1999, we entered into an agreement with U.S. Merchant
Systems, Inc. located in Newark, California. U.S. Merchant Systems provides
merchant accounts to our clients. We integrated merchant account and
transaction processing functions with our software, which allows purchasers of
Visual WebTools(TM) to accept all major credit cards and personal checks at
point-of-sale on their web sites. The term of this agreement is one year from
the date of execution and automatically renews each successive year
thereafter, unless canceled in writing.
Employees
As of the date of this filing we have 21 employees. We have six
employees in administration, four in sales/marketing, six in operations and
five engineers. Our employees are not presently covered by any collective
bargaining agreement. We have not experienced any work stoppages and believe
that our relations with our employees are good.
Reports to Security Holders
We are required to comply with the reporting requirements of the Exchange
Act of 1934 and must file annual, quarterly, and other reports with the SEC.
We are also subject to the proxy solicitation requirements of the Exchange Act
and, accordingly, we will furnish an annual report with audited financial
statements to our stockholders as part of our proxy statement. We currently
use an investor relations firm, Summit Resource Group, Inc., and interested
persons may call at 1-800-400-1290.
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We are an electronic filer and copies of our periodic reports and other
information should be available through the Internet by using the SEC's EDGAR
database which may be found at http://www.sec.gov. The public may read and
copy any materials we file with the SEC, including copies of this registration
statement at the SEC's Public Reference Room at 450 Fifth Street N.W.,
Washington D.C. 20549. The public may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0300.
PROPERTIES
Our principal offices are located in the Westgate Business Center, which
is located in Salt Lake City, Utah. This property serves as our main office
and data center. We believe this property will be adequate for our future
needs. We negotiated a new lease, which terminates December 30, 2003, with
Westgate Business Center in November 2001. We lease approximately 8,000
square feet of commercial office space and pay approximately $8,000 per month
under the lease. Either party may terminate the lease with 30-day written
notice prior to the expiration date, but if the lease is not terminated prior
to the expiration date, it continues on a month-to-month basis.
LEGAL PROCEEDINGS
On February 12, 2001, Pacific WebWorks received notice of Charge No.
A1-0184 filed with the State of Utah Labor Commission regarding an allegation
of racial discrimination charged by Andrew Renfro, a former employee. Mr.
Renfro claimed that he was forced to resign as our sales manager due to
demotions and pay cuts based on differential treatment based on his race and
color. We responded to the request for information from the Labor Commission
and stated that we believed Mr. Renfro was treated fairly while he was
employed by Pacific WebWorks. Mr. Renfro did not identify the remedy he was
seeking. An informational hearing was conducted on January 18, 2002, and an
Order was issued on February 26, 2002, dismissing all charges related to the
matter. Mr. Renfro appealed that decision and management attended a
conference to schedule further appeal procedures.
On April 16, 2001, One Source, a corporation, filed a complaint in the
Third District Court, Sandy Department, State of Utah, naming World Commerce
Network, LLC and Mat Dastrup, our former CFO, as defendants. One Source
alleged default under a certain Application for Credit and Personal Guaranty
and One Source sought the sum of $64,353.57, with 18% interest from November
15, 2000. On May 1, 2002 we received notice to appoint counsel within twenty
days.
We are involved in various disputes and legal claims arising in the
normal course of our business. Except for the actions discussed above, in the
opinion of management, any resulting litigation from these disputes and claims
will not have a material effect on our financial position and results of
operations.
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MANAGEMENT
Directors and Executive Officers
The directors and executive officers and key employees of Pacific WebWorks are
listed below. Their respective ages and positions are listed, as well as,
biographical information for each of these persons is presented below. Our
articles of incorporation provide for a board of directors consisting of at
least three, but no more than nine persons. Our directors serve until our
next annual meeting or until each is succeeded by a qualified director. Our
executive officers are chosen by our board of directors and serve at its
discretion. There are no family relationships between or among any of our
directors and executive officers.
Name Age Position Held
- ---------------- ------- -----------------------------
Christian R. Larsen 27 President and Director
Kenneth W. Bell 52 Chief Executive Officer and Director
Thomas R. Eldredge 34 Secretary/Treasurer and Chief Financial Officer
Allan E. Oepping 27 Director
Benjamin A. Black 29 Director
Christian R. Larsen: Mr. Larsen serves as President and a director of
Pacific WebWorks, Inc. and has done so since April 1999. From April 1999
through January 2001 he served as our Chief Executive Officer. For the two
years prior to April 1999, he served as Chief Operating Officer for Pacific
WebWorks and as a consultant for Utah WebWorks. In July 1993, he started
Innovative Research and Animated Design, Inc. ("IRAD") which developed custom
and commercial software for animation and special effects. He served as
President of IRAD from October 1993 until February 1997. IRAD grew to a
Company employing 28 individuals. He has seven years experience providing
computer consulting and business management services. Mr. Larsen filed a
Chapter 7 voluntary bankruptcy petition in May of 1997 in the District of Utah
Central Division of the United States Bankruptcy Court, which was discharged
in September of 1997.
Kenneth W. Bell: Mr. Bell was appointed as our Chief Executive Officer
and interim Director on January 5, 2001. He is President and a Director of
Logio, Inc. and has served in various offices for Logio since February 1997.
From April 1990 to December 1996, he served as President and Chief Financial
Officer of Kelmarc Corporation, a financial and management advisory company.
He has thirty years experience in a variety of finance and management
positions, including employment in the commercial banking area for fifteen
years in Utah and California. Mr. Bell received a bachelors degree from
Brigham Young University in 1972.
Thomas R. Eldredge: On January 5, 2001 our Board of Directors appointed
Mr. Eldredge as our Secretary/Treasurer and Chief Financial Officer. Mr.
Eldredge is a CPA and has over eleven years of experience in accounting, audit
and information technology. He spent over six years with Grant Thornton LLP,
one of the nation's ten largest public accounting firms. Most recently he was
a manager in the assurance department at Grant Thornton. Mr. Eldredge is an
adjunct professor at the University of Utah in the accounting and information
technology departments at the graduate and undergraduate levels and has
instructed students for over four years at the University, Grant Thornton's
National training center and Utah Valley State College. He received both his
Bachelor of Science and Master of Professional Accountancy from the University
of Utah. Mr. Eldredge has served as the President of the Utah Association of
Certified Public Accountants' Southern Chapter. In February 2001, our Board
of Directors appointed Mr. Eldredge as Corporate Secretary.
Allan E. Oepping: Mr. Oepping serves as a Director and as our Vice
President of Engineering. He is a Microsoft Certified Professional (MCP) and
has over nine years professional experience working with computer hardware and
software. He started with Utah WebWorks in November of 1997 as an independent
consultant, then became its Technical Director in August of 1998. He was the
head programmer for IRAD for five years. While at IRAD, Mr. Oepping developed
several new technologies, including a spatial division/isolation technique
which speeds up renderings from 200% to 700%. He attended Salt Lake Community
College in Salt Lake City, Utah
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during 1994. Mr. Oepping filed a Chapter 7 voluntary bankruptcy petition on
March 2, 1998, in the District of Utah, Central Division of the United States
Bankruptcy Court. The petition was discharged on June 12, 1998.
Benjamin A. Black: Mr. Black serves as a Director. He has over eight
years of professional experience in software development programming. He has
worked as Senior Programmer for Pacific WebWorks since April of 1997. He was
lead programmer at IRAD from 1994 through 1997. In 1995 he received his
Associate of Science degree in electronics technology from Salt Lake Community
College in Salt Lake City, Utah. He is a Microsoft Certified Professional
(MCP) and is experienced in advanced programming languages including C, C++,
and Perl.
EXECUTIVE COMPENSATION
The following table shows the compensation paid to our named executive
officers in all capacities during the past three fiscal years. We do not have
formal written agreements with our executive officers.
SUMMARY COMPENSATION TABLE
Annual Compensation
--------------------
Name and principal Other annual
position Year Salary($) Bonus ($) compensation ($)
- ------------------- --------- -------------- ----------- ---------------
Christian R. Larsen 2001 $ 55,750 $ 0 $ 0
President 2000 60,000 0 0
1999 60,000 0 0
Kenneth W. Bell 2001 67,125* 0 0
CEO 2000 0 0 0
1999 0 0 0
Thomas R. Eldredge 2001 67,292* 0 0
Secretary/Treasurer 2000 0 0 0
CFO 1999 0 0 0
Allan E. Oepping 2001 50,000 0 0
Director 2000 50,000 0 0
1999 50,000 0 0
Benjamin A. Black 2001 50,000 0 0
Director 2000 50,000 0 0
1999 50,000 0 0
Tom J. Hill 2001 90,250 0 0
Former Director ** 2000 84,118 0 0
1999 0 0 0
* Does not include salaries paid by Logio to these persons prior to
Pacific WebWorks' acquisition of Logio.
** Mr. Hill resigned on February 11, 2002
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Long Term Compensation
-----------------------
Awards Payouts
------- --------
Restricted Securities LTIP All
Name and principal stock underlying payouts other
position Year awards(s)($) Options/SARs (#) ($) Comp.($)
- ------------------- ------ ------------- ---------------- -------- ----------
Christian R. Larsen 2001 $ 0 325,000 $ 0 $ 0
President 2000 0 0 0 0
1999 0 0 0 0
Kenneth W. Bell 2001 0 637,878 0 0
CEO 2000 0 0 0 0
1999 0 0 0 0
Thomas R. Eldredge 2001 0 327,273 0 0
Secretary/Treasurer 2000 0 0 0 0
CEO 1999 0 0 0 0
Allan E. Oepping 2001 0 325,000 0 0
Director 2000 0 0 0 0
1999 0 0 0 0
Benjamin A. Black 2001 0 250,000 0 0
Director 2000 0 0 0 0
1999 0 0 0 0
Tom J. Hill 2001 0 300,000 0 0
Former Director 2000 0 0 0 0
1999 0 0 0 0
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
----------------
Percent of
Number of total
securities options/SAR's
underlying granted to Exercise or
Options/SAR's employees in base price Expiration
Name granted (#) fiscal year ($/sh) date
- --------------------- -------------- ------------ ---------- -----------
Christian R. Larsen 325,000 (2) 11% $ 0.75 4/4/2011
Kenneth W. Bell 37,878 (1) 19% 0.87 1/31/2011
600,000 (2) 20% 0.75 4/4/2011
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Thomas R. Eldredge 27,273 (1) 14% 0.87 1/31/2011
300,000 (2) 10% 0.75 4/4/2011
Allan E. Oepping 325,000 (2) 11% 0.75 4/4/2011
Benjamin A. Black 250,000 (2) 8% 0.75 4/4/2011
Tom Hill 300,000 (2) 10% 0.75 4/4/2011
(1) Options granted on 1/31/2001 vest upon grant and
(2) Options granted on 4/4/2001: 1/6th vests on grant and remainder
vests 1/6th every six months
Potential realizable value
at assumed annual rates of Alternative to
stock price appreciation for (f) and (g) grant
option term date value
Grant date present
Name 5% ($) 10% ($) value ($) (1)
--------------------- -------- --------- -------------------
Christian R. Larsen $121,875 $243,758 $ 182,000
Kenneth W. Bell 16,477 32,954 24,621
225,000 450,000 336,000
Thomas R. Eldredge 11,864 23,728 17,727
112,500 225,000 168,000
Allan E. Oepping 121,875 243,750 182,000
Benjamin A. Black 93,750 187,500 140,000
Tom Hill 112,500 225,000 84,000
Compensation of Directors.
We do not have any standard arrangement for compensation of our directors
for any services provided as director, including services for committee
participation or for special assignments.
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of our
outstanding common stock for each of our executive officers; each of our
directors; and all executive officers and directors as a group. We are
unaware of any person or group who own beneficially more than 5% of our
outstanding common stock. Beneficial ownership is determined according to the
rules of the SEC and generally includes voting or investment power with
respect to securities. Except as indicated by footnote, the persons named in
the table below have sole voting and investment power with respect to all
shares of common stock shown as beneficially owned by them. The percentage of
beneficial ownership is based on 23,991,655 shares representing 23,086,504
outstanding shares of common stock as of May 23, 2002, and options to purchase
905,151 common shares which may be exercised by the following persons within
the next 60 days.
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MANAGEMENT
Common Stock Beneficially Owned
-------------------------------
Name and Address of Number of Shares of Percentage
Beneficial Owners Common Stock Options (1) of Class
- ----------------------- ------------------- ------------ ----------
Christian R. Larsen 878,000 162,500 4.5%
180 South 300 West, Suite 400
Salt Lake City, Utah 84101
Kenneth W. Bell 217,311 (2) 337,878 2.4%
180 South 300 West, Suite 400
Salt Lake City, Utah 84101
Benjamin A. Black 500,000 125,000 2.7%
180 South 300 West, Suite 400
Salt Lake City, Utah 84101
Thomas R. Eldredge 0 177,273 1.0%
180 South 300 West, Suite 400
Salt Lake City, Utah 84101
Allan E. Oepping 697,500 162,500 3.7%
180 South 300 West, Suite 400
Salt Lake City, Utah 84101
All executive officers and 2,296,811 905,151 13.3%
directors as a group
(1) Represents options exercisable within the next 60 days (April 4,
2002).
(2) Includes 80,309 shares held by Mr. Bell and 137,002 shares owned
jointly with his spouse.
DESCRIPTION OF SECURITIES
Our Articles of Incorporation, as amended, authorize 50,000,000 shares of
common stock. As of May 23, 2002, we had 23,086,504 shares of common stock
issued and outstanding held by approximately 329 record holders. We estimate
that approximately 4.3 million shares of our outstanding common stock are
"restricted securities," as that term is defined in Rule 144. We have
approximately 18.7 million common shares which are unrestricted shares, except
for any of those shares that are acquired by affiliates. Restricted
securities may be sold in the public market only if they are registered or if
they qualify for an exemption from registration under Rules 144 or 701 of the
Securities Act, or otherwise. In addition, we have granted warrants to
purchase an aggregate of 6,900,000 common shares exercisable at prices ranging
from $0.30 to $7.50 per share which expire through April 25, 2006. In March
2001 we reserved 5,000,000 shares for our Incentive Stock Option Plan, which
currently has options to purchase 3,630,409 common shares exercisable through
October 2003.
Each holder of common stock is entitled to one vote for each share owned
of record on all matters voted upon by stockholders, and a majority vote of
the outstanding shares present at a stockholders' meeting is required for
actions to be taken by stockholders. Directors are elected by a majority vote
and the holders of the common stock do not have cumulative voting rights.
Accordingly, the holders of a majority of the voting power of the shares
voting for the election of directors can elect all of the directors if they
choose to do so. The common stock bears no preemptive rights, and is not
subject to redemption, sinking fund or conversion provisions. Holders of
common stock are entitled to receive dividends out of funds legally available
if, and when, declared by our Board of Directors and to participate pro rata
in any distribution of assets available for distribution upon liquidation of
Pacific WebWorks. Any dividends declared with respect to shares of common
stock will be paid pro rata in accordance with the number of shares of common
stock held by each stockholder.
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SELLING STOCKHOLDERS
The following table identifies the selling stockholders and indicates
their relationship to us within the past three years and the number of shares
of common stock owned by each prior to the offering, the estimated number of
shares to be offered for the selling stockholder's account and the estimated
number of shares and percentage of outstanding shares to be owned by each
selling stockholder after the completion of the offering. Since the selling
stockholders may sell all, a portion or none of their shares from time to
time, no firm estimate can be made of the aggregate number of shares that are
being offered or that will be owned by each selling stockholder upon
completion of the offering. Accordingly, the ownership amount and percentage
after the offering assumes exercise of all 5,600,000 warrants and the sale of
all of the registered shares.
Securities Number of Securities owned
owned prior shares being after offering
Name and relationship to offering (1) registered (1) Shares Percent
- ------------------------- ---------------- --------------- -------- ---------
AMCAN Services, Inc.
Accredited investor 1,000,000 1,000,000 0 0%
Compass Equity Partners
Warrant purchaser 1,000,000 1,000,000 0 0%
Condiv Investments, Inc.
Accredited investor 300,000 300,000 0 0%
MidWest First
Financial, Inc.
Accredited investor 300,000 300,000 0 0%
Pacific First National,
Inc.
Accredited investor 1,000,000 1,000,000 0 0%
State Management
Associates, L.C.
Accredited investor 1,000,000 1,000,000 0 0%
TST Corporation
Accredited investor 1,000,000 1,000,000 0 0%
(1) Represents shares issuable upon exercise of warrants.
The following chart describes the warrants which have been granted in
connection with the transactions described below.
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- ------------------------------------------------------------------------------
Date Number of
Selling Warrant Underlying Exercise Expiration
Stockholder Exercisable Shares Price Date
- ----------------------- -------------- -------------- ---------- -----------
AMCAN Services, Inc. 5/30/2001 1,000,000 $0.80 5/30/2003
Compass Equity Partners 4/25/2001 500,000 0.50 4/25/2006
" 500,000 0.75 "
Condiv Investments, Inc. 2/22/2000 200,000 5.00 2/22/2005
" 100,000 7.50 "
Midwest First National, 2/22/2000 200,000 5.00 2/22/2005
Inc. " 100,000 7.50 "
Pacific First National,
Inc. 5/30/2001 1,000,000 0.80 5/30/2003
State Management
Associates, L.C. 5/30/2001 1,000,000 0.80 5/30/2003
TST Corporation 5/30/2001 1,000,000 0.80 5/30/2003
- -----------------------------------------------------------------------------
Transactions Related to the Offering
We agreed to register 5,600,000 common shares under this prospectus based
on certain transactions between us and the selling stockholders, which are
described below.
On February 22, 2000, we entered into a purchase agreement with two
accredited investors, Condiv Investments, Inc. and MidWest First National,
Inc., for the purchase by those investors of up to 400,000 units for
$1,000,000. Each unit consisted of one share of our common stock and one "A"
Warrant and one "B" Warrant. The "A" Warrant granted the investor the right
to purchase one additional share at an exercise price of $5.00 and the "B"
Warrant granted the investor the right to purchase 1/2 of one additional share
at an exercise price of $7.50. Upon closing each investor acquired 200,000
common shares, one "A" Warrant to purchase an additional 200,000 common shares
and a "B" Warrant to purchase an additional 100,000 common shares. Also, each
investor promised not to acquire or own more than 4.99% of Pacific WebWorks'
outstanding common stock at any time. Neither Condiv Investment nor Midwest
First has exercised any warrants as of the date of this filing; however, both
have sold their 200,000 shares issued under the purchase agreement.
As part of the purchase agreement with Condiv Investments and MidWest
First Financial, we agreed to file a registration statement with the SEC to
register the shares held or to be acquired by these investors. As a result,
we filed a registration statement on Form S-1 on May 30, 2000, which was
granted acceleration without review by the SEC and was declared effective on
June 12, 2000. We filed a post-effective amendment No. 1 to that registration
statement on June 19, 2001. We agreed to use our best efforts to maintain the
effectiveness of the registration statement until its termination upon the
earliest of the following:
. when all of the registered common shares have been sold by the
selling stockholders;
. when the selling stockholders may sell the shares under the
provisions of Rule 144; or
. five years from the closing date.
On April 25, 2001, we entered into a consultant agreement with Columbia
Financial Group, Inc. We granted warrants to purchase 1,000,000 shares to
Columbia Financial in consideration for investor relations services. One
warrant provided for the purchase of 500,000 common shares at an exercise
price of $0.50 and the second warrant provided for the purchase of 500,000
common shares at $0.75 per share. We agreed to register the
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1,000,000 underlying shares for the warrants. On February 25, 2002, Columbia
Financial sold the warrants to Compass Equity Partners.
On May 30, 2001, we entered into a registration rights agreement related
to a private placement of 4,000,000 units sold to four accredited investors
for $1,600,000. Each investor, AMCAN Services, Inc., Pacific First National,
Inc., State Management Associates L.C., and TST Corporation, purchased
1,000,000 units for $400,000. The units consisted of one common share and a
warrant to purchase 1,000,000 shares at an exercise price of $0.80, which
expire through May 30, 2003. The investors have sold the 4,000,000 common
shares purchased in the transaction and we are registering the remaining
4,000,000 shares to be issued upon exercise of the warrants. On June 28,
2001, we filed a registration statement with the SEC which registered the
shares related to this transaction and it was declared effective without
review by the SEC on August 8, 2001. We agreed to maintain the effectiveness
of this registration statement or a post-effective registration statement
until the earlier of:
. the date all of the registered common shares have been sold by the
selling stockholders;
. the date the selling stockholders receive an opinion of counsel that
they may sell the shares under the provisions of Rule 144; or
. three years from the subscription date.
PLAN OF DISTRIBUTION
We have agreed to register these shares for the benefit of the selling
stockholders; but, the registration of these shares does not necessarily mean
that any of them will be offered or sold by the selling stockholders. The
selling stockholders will have absolute discretion as to when and if shares
are sold or if the warrants are exercised, whether the shares issued upon
exercise will be sold, and the manner and timing of sales of the shares. They
may sell all or a portion of the shares through public or private
transactions, on or off established markets, or in negotiated transactions or
otherwise.
The shares may be sold directly or through brokers or dealers, or in a
distribution by one or more underwriters on a firm commitment or best-efforts
basis. The methods by which the shares may be sold may include:
. a block trade, which may involve crosses, in which the broker or
dealer will attempt to sell the securities as agent but may
position and resell a portion of the block as principal to
facilitate the transaction;
. purchases by a broker or dealer as principal and resale by the
broker or dealer for its own account;
. ordinary brokerage transactions and transactions in which the
broker solicits purchasers;
. privately negotiated transactions;
. through the writing of options on the shares;
. the selling stockholders may deliver all or a portion of the shares
to cover a short sale or sales made after the date of this
prospectus, or a call equivalent position or a put equivalent
position entered or established after the date of this prospectus;
and/or
. the selling stockholders may also sell all or any portion of the
shares in reliance upon Rule 144 or Regulation S.
The sale price to the public may be:
. the market price prevailing at the time of sale;
. a price related to the prevailing market price;
. at negotiated prices; or
. any other price as the selling stockholders determine from time to
time.
We will not use the services of underwriters or dealers in connection
with the sale of the shares registered
31
33
under this prospectus. The selling stockholders or their respective pledgees,
donees, transferees or other successors in interest, may also sell the shares
directly to market makers acting as principals and/or broker-dealers acting as
agents for themselves or their customers. These broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
selling stockholders. These broker-dealers may also receive compensation from
the purchasers of shares for whom the broker-dealers may act as agents or to
whom they sell as principal or both. This compensation might be in excess of
customary commissions as to a particular broker-dealer. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that selling stockholders will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price.
The selling stockholders may also sell all or any part of the shares
offered in this prospectus through an underwriter. As of the date of this
filing, no selling stockholder has entered into any agreement with a
prospective underwriter and there is no assurance that any such agreement will
be entered into. If a selling stockholder enters into such an agreement or
agreements, the relevant details will be disclosed in a supplement or revision
to this prospectus.
The selling stockholders and any broker-dealers participating in the
distribution of the shares may be deemed to be "underwriters" within the
meaning of the Securities Act, and any profit on the sale of the shares by the
selling stockholders and any commissions received by any broker-dealers may be
deemed to be underwriting commissions or discounts under the Securities Act.
Since the selling stockholders may be deemed to be "underwriters" they will be
subject to the prospectus delivery requirements of the Securities Act.
We and the selling stockholders will be subject to applicable provisions
of the Exchange Act of 1934 and the rules and regulations promulgated under
it, including, without limitation, Regulation M. Regulation M restricts
certain activities of the selling stockholders and may limit the timing of
purchases and sales of any of the shares by the selling stockholder or any
other person. Also, Regulation M may restrict the ability of any person
engaged in the distribution of the shares to engage in market-making
activities with respect to the particular shares being distributed for a
period of up to five business days prior to the commencement of the
distribution. All of these limitation may affect the marketability of our
shares and the ability of any person or entity to engage in market-making
activities with respect to the shares.
In the event a block trade or other special offering of these shares is
arranged, then we will distribute a prospectus supplement, if required, that
will identify the name of any dealers or agents and any commissions and other
terms constituting compensation from the selling stockholders and as well as
any other required information.
Some states securities laws may require the shares be sold only through
registered or licensed brokers or dealers. In addition, in some states, these
shares may not be sold unless they have been registered or qualified for sale
in that state or an exemption from the registration or qualification
requirement of that state is available and is complied with.
INTEREST OF NAMED EXPERT AND COUNSEL
We are not aware of any expert or legal counsel named in this prospectus
who will receive a direct or indirect substantial interest in the offering.
Our counsel, Cindy Shy, P.C., has provided an opinion regarding the validity
of the shares to be issued in connection with this prospectus. Our financial
statements for the year ended December 31, 2001 and 2000, have been audited by
Chisholm & Associates, Certified Public Accountants, as set forth in their
report appearing with the financial statements. The financial statements are
included in reliance upon their report given on the authority of that firm as
experts in accounting and auditing.
32
34
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITY
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers or persons controlling us, we
have been informed that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
We agreed to indemnify AMCAN Services, Inc., Columbia Financial Group,
Inc., Condiv Investments, Inc., MidWest First Financial, Inc., Pacific First
National, Inc., State Management Associates, LC and TST Corporation for
liabilities arising under the Securities Act. We will indemnify each of these
selling stockholders, its officers, directors and constituent partners or
members, if any, and each person controlling them (within the meaning of the
Securities Act), against all claims, losses, damages, liabilities, actions
suffered or incurred by any of them, to the extent these claims, losses,
damages or liabilities arise out of or are based upon:
. any untrue statement or alleged untrue statement of a material fact
contained in any prospectus or any related registration statement
incident to this registration; or
. any omission or alleged omission to state a material fact required to
be stated or necessary to make the statements not misleading; and
. any violation by us of any rule or regulation promulgated under the
Securities Act applicable to Pacific WebWorks and relating to actions
or inaction required of us in connection with any registration.
Each selling stockholder has agreed to indemnify and reimburse Pacific
WebWorks and its officers, directors and each controlling person for any
actions based upon any untrue statement or alleged untrue statement or any
omission or alleged omission based upon written information furnished to us by
the selling stockholders for use in the preparation of the registration
statement or prospectus.
AVAILABLE INFORMATION
This prospectus does not contain all the information in or attached as an
exhibit to the registration statement and purchasers should refer to the
exhibits to the registration statement for the complete text. The
registration statement and its exhibits may be inspected at the office of the
SEC without charge as described above in the "Business - Reports to Security
Holders" section. Also, a copy of the registration statement, any
post-effective amendment and exhibits may be accessed through the SEC's EDGAR
Archive located at its web site at http://www.sec.gov. Additional updating
information with respect to the securities covered by this prospectus may be
provided in the future to purchasers by means of amendments or supplements to
this prospectus.
In addition, the information incorporated by reference is available to
you without charge upon your written or oral request. Pacific WebWorks agrees
to respond to your requests for the additional information within one business
day of receipt of the request. We will send the copies of the document by
first class mail or other equally prompt means. You must address your request
to:
Investor Relations
Pacific WebWorks, Inc.
180 South 300 West, Suite 400
Salt Lake City, Utah 84101
CHANGES IN ACCOUNTANTS
As previously reported, on August 3, 2000, Chisholm & Associates,
Certified Public Accountants replaced Crouch, Bierwolf & Chisholm, Certified
Public Accountants, as our independent auditor.
33
35
INDEX TO FINANCIAL STATEMENTS
Financial statements of Pacific WebWorks for the three month periods ended
March 31, 2002 and 2001 (unaudited)
Consolidated Balance Sheets........................................ F-1
Consolidated Statements of Operations.............................. F-2
Consolidated Statements of Cash Flows.............................. F-3
Notes to Financial Statements...................................... F-4
Financial statements of Pacific WebWorks for years ended December 31, 2001 and
2000
Independent Auditors' Report....................................... F-13
Consolidated Balance Sheets ....................................... F-14
Consolidated Statements of Operations.............................. F-15
Consolidated Statements of Cash Flows.............................. F-16
Consolidated Statements of Stockholders' Equity ................... F-17
Notes to Financial Statements ..................................... F-19
34
36
Pacific WebWorks, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, March 31,
2001 2002
------------- -------------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 249,813 $ 327,981
Receivables
Trade, less allowance for doubtful
receivables of $46,000 in 2002 and
$53,107 in 2001 149,742 125,134
Employee 768 768
Prepaid expenses 140,773 66,304
------------- -------------
Total current assets 541,096 520,187
------------- -------------
PROPERTY AND EQUIPMENT, NET AT COST 262,828 211,871
OTHER ASSETS 2,964,654 2,964,146
------------- -------------
$ 3,768,578 $ 3,696,204
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long- term capital leases $ 460 $ -
Capital leases in default 438,373 438,648
Payables past due 290,795 277,809
Overdraft in bank 23,766 23,766
Accounts payable 275,368 94,769
Accrued liabilities 301,928 287,513
Other current liabilities 222,048 225,048
Deferred revenue 109,668 117,757
Notes payable 216,580 -
------------- -------------
Total current liabilities 1,878,986 1,465,310
STOCKHOLDERS' EQUITY
Common stock - par value $0.001; authorized
50,000,000; issued and outstanding 23,086,504
in 2002 and 23,076,688 in 2001 23,077 23,087
Additional paid-in capital 14,998,151 15,045,580
Stock subscription receivable (40,000) -
Accumulated deficit (13,091,636) (12,837,773)
------------- -------------
Total stockholders' equity 1,889,592 2,230,894
------------- -------------
$ 3,768,578 $ 3,696,204
============= =============
The accompanying notes are an integral part of these statements.
F-1
35
Pacific WebWorks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
March 31,
2001 2002
------------- -------------
Revenues, net
Software, access and license fees $ 1,080,080 $ 42,118
Hosting, gateway and maintenance fees 243,154 457,247
Training, design and other 28,737 54,614
------------- -------------
1,351,971 553,979
Cost of sales 227,700 114,774
------------- -------------
Gross profit 1,124,271 439,205
Selling expenses 219,792 96,581
Research and development 143,095 77,235
General and administrative 451,782 297,126
Depreciation and amortization 574,422 54,535
Compensation expense for options and warrants 12,900 43,768
Impairment loss - long-lived assets 122,685 -
------------- -------------
Total operating expenses 1,524,676 569,245
------------- -------------
Loss from operations (400,405) (130,040)
------------- -------------
Other income (expense)
Loss on sale or abandonment of assets - (7,500)
Interest income 3,566 1,267
Interest expense (41,434) (12,487)
Penalties - (21,388)
Other income, net - 7,748
------------- -------------
(37,868) (32,360)
------------- -------------
Net income (loss) before extraordinary gain (438,273) (162,400)
Extraordinary gain net of income tax - 416,263
------------- -------------
NET EARNINGS (LOSS) $ (438,273) $ 253,863
============= =============
Net earnings (loss) per common share - basic and dilutive
Net loss before extraordinary gain $ (0.03) $ (0.01)
Extraordinary gain - 0.02
------------- -------------
Net earnings $ (0.03) $ 0.01
============= =============
Weighted-average number of shares outstanding
Basic 17,132,209 23,079,960
============= =============
Diluted 17,132,209 23,116,997
============= =============
The accompanying notes are an integral part of these statements.
F-2
36
Pacific WebWorks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
March 31,
2001 2002
------------- -------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net income (loss) $ (438,273) $ 253,863
Adjustments to reconcile net loss
to net cash used in operating activities
Depreciation & amortization 574,422 54,535
Issuance of options and warrants
for compensation 12,900 43,768
Impairment loss 122,685 -
Bad debt expense 40,308 27,165
Loss on sale or abandonment of
property and equipment - 7,500
Extraordinary gain - (416,263)
Changes in assets and liabilities
(Net of effects of acquisitions)
Receivables 2,065 (31,450)
Prepaid expenses and other assets (408) 78,648
Accounts payable and accrued liabilities 44,111 23,576
Deferred revenue (1,055,967) 8,089
------------- -------------
Total adjustments (259,884) (204,432)
Net cash provided by (used in)
operating activities (698,157) 49,431
------------- -------------
Cash flows from investing activities
Purchases of property and equipment (72,127) (11,078)
Cash acquired in acquisitions 5,058 -
------------- -------------
Net cash used in investing activities (67,069) (11,078)
------------- -------------
Cash flows from financing activities
Proceeds from issuance of notes payable 661,664 -
Cash received for contributed capital 1,475 -
Cash received for stock subscription - 40,000
Principal payments of long-term obligations (20,928) (185)
------------- -------------
Net cash provided by financing activities 642,211 39,815
------------- -------------
Net increase (decrease) in cash and cash equivalents (123,015) 78,168
Cash and cash equivalents at beginning of period 163,801 249,813
------------- -------------
Cash and cash equivalents at end of period $ 40,786 $ 327,981
============= =============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 3,401 $ -
Cash paid for income taxes - -
Non-cash financing activities:
Issuance of common stock for prepaid services,
deposit and rent 268,600 -
Purchase of Logio subsidiary for stock 2,450,000 -
Prepaid insurance for stock - 3,671
The accompanying notes are an integral part of these statements.
F-3
37
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION
The Company
- -----------
Pacific WebWorks, Inc. and its subsidiaries, engage in the development and
distribution of web tools software, electronic business storefront hosting,
and Internet payment systems for individuals and small to mid-sized
businesses.
Basis of Presentation
- ---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for form 10-QSB of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting standards have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. The accompanying
interim consolidated financial information reflects all adjustments
(consisting of normal recurring adjustments), which, in the opinion of
management, are necessary for a fair presentation of the results for the
periods shown. These financial statements should be read in conjunction with
the audited consolidated financial statements and the notes thereto included
in the Company's Annual Report on Form 10-K for the year ended December 31,
2001. The results of operations for the quarter ended March 31, 2002 may not
be indicative of the results that may be expected for the fiscal year ended
December 31, 2002. Certain prior period balances have been reclassified to
conform with current period presentation.
The accompanying condensed consolidated financial statements include the
accounts of Pacific WebWorks, Inc. and its wholly owned subsidiaries,
Intellipay, Inc., World Commerce Network, LLC., and Logio, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes. Management
believes that the estimates used in preparing the financial statements are
reasonable and prudent; however, actual results could differ from these
estimates.
F-4
38
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION - Continued
Revenue Recognition
- -------------------
The Company recognizes revenue in accordance with the Securities and Exchange
Commission, Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in
Financial Statements." SAB 101 clarifies application of generally accepted
accounting principles to revenue transactions. The Company also follows SOP
97-2.
Revenues from up-front fees are deferred and recognized over the period
services are performed (which is generally one year). Revenues from monthly
hosting, maintenance, transaction and processing fees are recorded when
earned.
Impairment of Long-Lived and Intangible Assets
- ----------------------------------------------
The Company has adopted Statement of Financial Accounting Standard No. 144
(SFAS 144), "Accounting for the Impairment or Disposal of Long-Lived Assets".
SFAS replaces Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of". SFAS 144 prescribes,
among other things, an accounting model for long-lived assets to be disposed
of including sales and discontinued operations. The Company is evaluating the
impact of this pronouncement on its financial position and results of
operations in future filings.
Previously, the Company followed Statement of Financial Accounting Standards
(SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of, which requires that impairment losses be
recognized on such assets when indicators of impairment are discovered and
estimated undiscounted future cash flows to be generated from those assets are
less than their carrying value. During the three months ended March 31, 2001,
and as a result of certain events and management's assessment of impaired
assets, the Company recorded $122,685 in losses relating to the impairment of
certain long-lived assets in Logio, Inc.
Business Combinations and Goodwill
- ----------------------------------
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
141 (SFAS 141), "Business Combinations" and No. 142 (SFAS 142), "Goodwill and
Other Intangible Assets", which establishes new standards for the treatment of
goodwill and other intangible assets. SFAS 142 prescribes that amortization
of goodwill will cease as of the adoption date (January 1, 2002).
Additionally, the Company will be required to perform an impairment test on
goodwill and other intangible assets annually, and whenever events and
circumstances occur that might affect the carrying value of such assets. The
Company has not yet performed a formal impairment test of goodwill and is
unsure of the effect such a test will have on the Company's results of
operations and financial position.
F-5
39
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION - Continued
Recently Issued Accounting Pronouncements
- -----------------------------------------
In October 2001, the FASB issued Statement of Financial Accounting Standard
No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of Long-Lived
Assets". SFAS replaces Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS 144
prescribes, among other things, an accounting model for long-lived assets to
be disposed of including sales and discontinued operations. The Company is
evaluating the impact of this pronouncement on its financial position and
results of operations in future filings.
Earnings (loss) Per Share
- -------------------------
The computation of net earnings (loss) per share of common stock is based on
the weighted average number of shares outstanding during each period
presented. The Company utilizes the treasury stock method to calculate
earnings (loss) per share. Potentially issuable common shares totaling
2,917,500 related to options and 5,562,963 related to warrants were excluded
from the calculation of diluted loss per share because their effects were
anti-dilutive.
The following is the calculation for weighted average common shares used in
basic and dilutive net earnings (loss) per share:
Three months ended March 31,
2001 2002
------------- -------------
Common shares outstanding during the period 15,008,000 23,076,688
Weighted average common shares issued 2,124,209 6,544
Weighted average common shares used
in basic earnings (loss) per share 17,132,209 23,083,232
------------- -------------
Dilutive effects of potentially issuable
common shares (warrants) - 37,037
------------- -------------
Weighted average number of common shares
and dilutive potential common stock used
in diluted earnings (loss) per share 17,132,209 23,120,269
============= =============
F-6
40
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
NOTE 2 - MANAGEMENT'S PLANS AND ISSUES AFFECTING LIQUIDITY
The Company's financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has a limited operating
history and has sustained losses since inception. In addition, although the
Company had positive cash flows form operations of $49,431 during the three
months ended March 31, 2002, it had negative cash flows from operations of
$1,150,272 during the year ended December 31, 2001 and $698,157 during the
three-month period ended March 31, 2001. The company had negative working
capital of $925,124 at March 31, 2002 and $1,337,890 at December 31, 2001. As
a result, the Company has relied significantly upon equity and debt funding to
support certain of its operations.
The Company is working through various matters related to disputes with a
vendor and creditors, which may impact its cash position (see Note 9).
The Company has taken steps to reduce its burn rate in order to meet its
monthly cash requirements from operations with its reoccurring monthly cash
revenues. This has been accomplished through a reduction in personnel,
relocation to lower-cost office facilities and other expense reduction
activities. The Company has also focused its immediate attention to the
operations and growth of its core business units: Pacific WebWorks, Inc. and
Intellipay, Inc.
The Company expects to further generate positive cash flows from operations
through continued burn rate reduction and our business development and sales
activities. Further equity placements and debt issuance may be required to
support operations and to pay existing liabilities of the Company.
There is substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments to reflect
the possible effects on the recoverability and classification of assets or the
amounts and classification of liabilities that may result from the outcome of
this uncertainty.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment includes the following: December 31, March 31,
2001 2002
------------- -------------
Computer Equipment $ 421,770 $ 427,842
Equipment 83,961 75,162
Software 83,971 84,111
Furniture and Fixtures 95,112 91,956
Leasehold Improvements - 2,943
------------- -------------
684,814 682,014
Less Accumulated Depreciation (421,986) (470,144)
------------- -------------
$ 262,828 $ 211,870
============= =============
F-7
41
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
NOTE 4 - OTHER ASSETS
Other assets include the following: December 31, March 31,
2001 2002
------------- -------------
Goodwill $ 6,628,642 $ 2,946,253
Acquired technology 824,480 -
Other 19,250 17,893
------------- -------------
7,472,372 2,964,146
------------- -------------
Accumulated amortization (2,730,950) -
Impairment losses (1,776,768) -
------------- -------------
$ 2,964,654 $ 2,964,146
============= =============
NOTE 5 - ACCRUED AND OTHER LIABILITIES
Accrued liabilities
- -------------------
Accrued liabilities consist of the following: December 31, March 31,
2001 2002
------------- -------------
Payroll related liabilities $ 147,162 $ 157,107
Interest payable 58,894 29,584
Reseller commissions 65,690 70,640
Contingent liabilities 30,000 30,000
Other 182 182
------------- -------------
$ 301,928 $ 287,513
============= =============
Payroll related liabilities totaling $164,127 at March 31, 2002 include
approximately $90,600 in estimated taxes, penalties and interest past due from
Intellipay, Inc. to the Internal Revenue Service for periods prior to and
immediately after its acquisition by Pacific WebWorks, Inc. Intellipay, Inc.
is currently attempting to negotiate an installment plan with the Internal
Revenue Service for this liability.
Other current liabilities
- -------------------------
Other current liabilities consist of estimated returns and chargebacks from a
leasing company that funded customer purchases and placed them on a payment
plan during 2000. The Company is responsible for recourse on leases on which
customers have not made first payment. Estimated chargebacks and other
estimated returns and refunds are approximately $225,000 at March 31, 2002 and
$222,000 at December 31, 2001 for all companies under consolidation.
F-8
42
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
NOTE 6 - LIABILITIES PAST DUE AND IN DEFAULT
As of March 31, 2002, the Company's subsidiary, Logio, Inc., is in default of
capital lease obligations approximating $439,000 and has other payables past
due approximating $238,000, which includes a note payable in default
approximating $120,000 and an overdraft of approximately $24,000.
As of March 31, 2002, the Company's subsidiary, World Commerce Network has
payables past due approximating $64,000.
NOTE 7 - STOCKHOLDERS' EQUITY
Equity Incentive Plan
- ---------------------
On March 8, 2001, the Board of Directors adopted the Pacific WebWorks, Inc.
2001 Equity Incentive Plan (the Plan). The Plan allows for the granting of
awards in the form of stock options, stock appreciation rights or restricted
shares to employees, independent directors and certain consultants. The
Company may grant awards representing up to 5,000,000 shares of the Company's
common stock under the Plan. The Plan has not been approved by the Company's
shareholders as of March 31, 2002.
As of March 31, 2002, approximately 2,917,500 options were outstanding at
exercise prices ranging from $0.75 to $3.53 per share and approximately
5,600,000 warrants were outstanding and exercisable at prices ranging from
$0.50 to $7.50 per share. As of March 31, 2002, approximately 972,500 options
were exercisable at exercise prices ranging from $0.75 to $3.53 per share.
Options forfeited during the three months ended March 31, 2002 approximate
10,076 at exercise prices ranging from $0.75 to $0.87 per share.
Issuance of stock
- -----------------
In March 2002, the Company issued a total of 9,816 shares of its common stock
as a prepayment for certain insurance services totaling $3,671. The services
will be provided and related expenses will be recognized over the one-year
period in which the services are to be received by the Company.
F-9
43
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
NOTE 8 - EXTRAORDINARY GAIN
In January 2002, World Commerce Network settled a liability, approximating
$12,000, for $1 in value with a printing company.
Also in January 2002, World Commerce Network settled a liability with U.S.
Merchant Systems, a former member, approximating $433,000 for approximately
$28,900 in cash and receivables. World Commerce Network has been
unconditionally forgiven and released from this liability in the settlement
agreement.
The total of the settlement, release and forgiveness of these liabilities
approximates $416,000 at March 31, 2002 and has been recorded as an
extraordinary gain on the statement of operations.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Threatened litigation
- ----------------------
In April 2001, one of World Commerce Network's former vendors filed a
complaint alleging default under a certain application for credit and personal
guaranty made by a former officer of the Company. The vendor seeks
approximately $65,000 plus interest. The Company is defending the claim and
believes the amount should be reduced based upon the vendor's performance and
other disputes. The Company has filed an answer to the complaint and further
litigation is pending. The Company has recorded amounts in the consolidated
financial statements representing its estimated liability for this matter.
Management believes that the amount recorded is sufficient to cover the
resulting liability from this complaint, if any.
In February 2001, the Company received notice from the State of Utah Labor
Commission regarding an allegation of racial discrimination charged by a
former employee. The former employee claims that he was forced to resign as
sales manager due to demotions and pay cuts related to alleged prejudicial
treatment based on his race and color. The Company responded to the request
for information by the Labor Commission and stated that it believes the former
employee was treated fairly while under its employ. On January 18, 2002, an
informational hearing was conducted with the State of Utah Labor Commission.
On February 28, 2002, in a letter from the State of Utah Labor Commission, the
Company was dismissed of all charges related to this matter. On April 10,
2002, the Company was notified by the Sate of Utah Labor Commission of an
additional conference that will take place in June 2002 related to the former
employee's appeal to the Company's dismissal in this matter.
The Company is involved in other various disputes and legal claims in the
normal course of business. It is not possible to state the ultimate
liability, if any, in these matters. In the opinion of management, any
resulting litigation will have no material effect on the financial position
and results of operations of the Company in excess of amounts recorded.
F-10
44
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
NOTE 10 - SEGMENT REPORTING
Segment reporting by business unit follows:
Three months ended Pacific
March 31, 2001(a) WebWorks Intellipay WCN Logio(b)
- --------------------------- ------------ ------------ ------------ -----------
Current assets $ 408,784 $ 87,434 $ 117,831 $ 602
Total assets 8,729,632 449,971 144,224 872,123
Current liabilities 1,535,521 252,027 945,136 234,506
Total liabilities 1,535,521 1,438,318 1,647,756 758,430
Revenues, net $ 269,201 $ 275,321 $ 807,449 $ -
Income(loss) from operations (746,268) (64,936) 690,892 (280,093)
Net income (loss) $ (751,335) $ (83,015) $ 678,763 $ (282,686)
________________________________________________
(a) Amounts include all intercompany receivables, payables, revenues and
expenses prior to elimination for consolidation.
(b) Includes Logio, Inc. from the date of acquisition February 8, 2001 to
March 31, 2001. February 8, 2001 to December 31, 2001.
F-11
45
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
NOTE 10 - SEGMENT REPORTING - Continued
Three months ended Pacific
March 31, 2002(a) WebWorks Intellipay WCN Logio
- --------------------------- ------------ ------------ ------------ -----------
Current assets $ 438,279 $ 81,237 $ 671 $ -
Total assets 5,700,864 163,216 671 71,362
Current liabilities 326,585 187,654 235,384 715,687
Total liabilities 326,585 1,607,918 912,181 858,549
Revenues, net $ 295,765 $ 258,214 $ - $ -
Income(loss) from operations (73,964) (28,280) (219) (27,577)
Extraordinary gain - - 416,263 -
Net income (loss) $ (71,350) $ (56,186) $ 416,358 $ (34,959)
____________________________________________________
(a) Amounts include all intercompany receivables, payables, revenues and
expenses prior to elimination for consolidation.
NOTE 11 - MARKET RISK
The Company distributes its products and services primarily through its active
third party resellers. During the three months ended March 31, 2002
approximately $227,000 and $44,000 of total net sales derived from monthly
hosting and gateway services represents customer portfolios acquired through
the company's two largest active resellers' efforts, respectively. Customer
acquisition from these two active reseller channels accounts for approximately
50% and 10% of total hosting and gateway related sales (net) for the three
months ended March 31, 2002.
Approximately 45% of net accounts receivable at March 31, 2002 relate to
amounts owed to the Company from resellers for hosting and gateway fees
collected.
Commissions expense to resellers for hosting and gateway fees collected by the
Company approximate $43,000 for the three months ended March 31, 2002 and are
included in cost of sales.
The Company's sales plan is currently centered on the accumulation of a
monthly hosting and gateway services portfolio of customers through large
resellers.
F-12
46
CHISHOLM & ASSOCIATES
A Professional Certified Public Accountants Office (801)292-8756
Corporation P.O. Box 540216 Fax (801)292-8809
North Salt Lake, Utah 84054
_____________________________________________________________________________
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Pacific WebWroks, Inc.
Salt Lake City, UT
We have audited the accompanying consolidated balance sheets of Pacific
WebWorks, Inc. as of December 31, 2001 and 2000 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Pacific WebWorks, Inc. as of December 31, 2001 and 2000 and the
consolidated results of their operations and cash flows for the years then
ended in conformity with generally accepted accounting principles in the
United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note B to
the consolidated financial statements, the Company has had recurring operating
losses and is dependent upon financing to continue operations. These factors
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note B.
The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ Chisholm & Associates
Chisholm & Associates
North Salt Lake, Utah
January 31, 2002
F-13
47
Pacific WebWorks, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, December 31,
2001 2000
------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 249,813 $ 163,801
Receivables
Trade, less allowance for doubtful receivables
of $53,107 in 2001 and $88,487 in 2000 149,742 257,492
Employee 768 2,469
Prepaid expenses 140,773 275,022
------------- -------------
Total current assets 541,096 698,784
------------- -------------
PROPERTY AND EQUIPMENT, NET AT COST 262,828 374,259
OTHER ASSETS 2,964,654 4,331,979
------------- -------------
$ 3,768,578 $ 5,405,022
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long- term capital leases $ 460 $ 2,425
Capital leases in default 438,373 -
Payables past due 290,795 -
Overdraft in bank 23,766 -
Accounts payable 275,368 611,950
Accrued liabilities 301,928 193,161
Other current liabilities 222,048 197,048
Deferred revenue 109,668 1,811,020
Notes payable 216,580 216,580
Notes payable - related parties - 250,000
------------- -------------
Total current liabilities 1,878,986 3,282,184
Long-term capital lease obligations - 670
STOCKHOLDERS' EQUITY
Common stock - par value $0.001; authorized
50,000,000; issued and outstanding 23,076,688
in 2001 and 15,008,000 in 2000 23,077 15,008
Additional paid-in capital 14,998,151 10,153,603
Stock subscription receivable (40,000) -
Accumulated deficit (13,091,636) (8,046,443)
------------- -------------
Total stockholders' equity 1,889,592 2,122,168
------------- -------------
$ 3,768,578 $ 5,405,022
============= =============
The accompanying notes are an integral part of these statements.
F-14
48
Pacific WebWorks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
For the
Years ended
December 31,
2001 2000 1999
------------- ------------- -------------
Revenues, net
Software, access and license fees $ 1,778,055 $ 4,242,476 $ -
Hosting, gateway and
maintenance fees 1,196,847 615,705 -
Training, design and other 124,277 96,203 305,628
------------- ------------- -------------
3,099,179 4,954,384 305,628
Cost of sales 543,621 811,506 42,874
------------- ------------- -------------
Gross profit 2,555,558 4,142,878 262,754
Selling expenses 592,780 4,802,397 406,917
Research and development 449,323 1,044,842 320,479
General and administrative 1,571,481 2,375,252 786,740
Depreciation and amortization 1,903,091 1,095,261 30,572
Compensation expense for options
and warrants 232,549 28,366 1,242,584
Impairment loss - goodwill and other
long-lived assets 2,688,300 - -
------------- ------------- -------------
Total operating expenses 7,437,524 9,346,118 2,787,292
------------- ------------- -------------
Loss from operations (4,881,966) (5,203,240) (2,524,538)
------------- ------------- -------------
Other income (expense)
Loss on sale or abandonment
of assets (69,319) - -
Interest income 8,042 13,989 1,246
Interest expense (119,627) (70,440) (19,243)
Other, net 17,677 - (25,000)
------------- ------------- -------------
(163,227) (56,451) (42,997)
------------- ------------- -------------
NET LOSS $ (5,045,193) $ (5,259,691) $ (2,567,535)
============= ============= =============
Net loss per common share - basic
and diluted $ (0.24) $ (0.40) $ (0.27)
============= ============= =============
Weighted-average number of shares
outstanding - basic and diluted 20,694,550 13,140,360 9,632,500
============= ============= =============
The accompanying notes are an integral part of these statements.
F-15
49
Pacific WebWorks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the
years ended
December 31,
2001 2000 1999
------------- ------------- -------------
<s> <c> <c> <c>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net loss $ (5,045,193) $ (5,259,691) $ (2,567,535)
Adjustments to reconcile net loss
to net cash used in operating activities
Depreciation & amortization 1,903,091 1,095,261 30,572
Issuance of options and warrants
for compensation 232,549 28,366 1,255,800
Impairment loss 2,688,300 - -
Bad debt expense 144,376 111,731 -
Loss on sale or abandonment of property
and equipment 69,319 - -
Loss on investment - - 25,000
Other adjustments 34,661 25,945 20,000
Changes in assets and liabilities
(Net of effects of acquisitions)
Receivables (31,756) (143,225) (101,579)
Prepaid expenses and other assets 652,872 (258,689) (29,549)
Accounts payable and accrued liabilities (97,139) 478,775 121,064
Deferred revenue (1,701,352) 1,821,378 -
------------- ------------- -------------
Total adjustments 3,894,921 3,159,542 1,321,308
Net cash used in operating activities (1,150,272) (2,100,149) (1,246,227)
------------- ------------- -------------
Cash flows from investing activities
Purchases of property and equipment (80,141) (250,373) (148,135)
Proceeds from sale of property and equipment 14,412 - -
Cash paid for deposits - (12,000) -
Cash paid for investment - - (25,000)
Cash from escrow - - 750,000
Cash paid to related party - - (166,046)
Cash acquired in acquisitions 5,058 9,718 -
------------- ------------- -------------
Net cash used in investing activities (60,671) (252,655) 410,819
------------- ------------- -------------
Cash flows from financing activities
Overdraft in bank 23,766 - -
Proceeds from issuance of notes payable 900,000 2,006,580 980,000
Cash received for contributed capital 1,475 - -
Net proceeds from issuance of stock 416,001 375,000 -
Principal payments of long-term obligations (44,287) (18,873) -
------------- ------------- -------------
Net cash provided by financing activities 1,296,955 2,362,707 980,000
------------- ------------- -------------
Net increase decrease in cash and
cash equivalents 86,012 9,903 144,592
Cash and cash equivalents at beginning of period 163,801 153,898 9,306
------------- ------------- -------------
Cash and cash equivalents at end of period $ 249,813 $ 163,801 $ 153,898
============= ============= =============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 65,879 $ 29,213 $ 1,400
Cash paid for income taxes - - -
Non-cash financing activities:
Issuance of common stock for prepaid
services, deposit and rent $ 488,600 $ - $ -
Purchase of Logio subsidiary for stock 2,450,000 - -
Retired debt through escrow 1,214,000 - -
Prepaid insurance for stock 70,000 25,945 20,000
Payment of debt for common stock - 2,637,536 500,000
Loss in joint venture - - 25,000
The accompanying notes are an integral part of these statements.
F-16
50
Pacific WebWorks, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 2001, 2000, and 1999
Additional Stock
Price per Common Stock Paid-in Subscriptions Accumulated
share Shares Amount Capital Receivable Deficit Totals
------------ ------------ ------------ ------------ ------------ ------------ ------------
<s> <c> <c> <c> <c> <c> <c> <c>
Balances at January 1, 1999 5,000,000 5,000 5,000 - (219,217) (209,217)
Reverse acquisition and
reorganization adjustment $ - 5,000,000 5,000 995,000 - - 1,000,000
Issuance of stock for
insurance policy 1.43 14,000 14 19,986 - - 20,000
Issuance of stock for
debt conversion 1.31 381,679 381 499,618 - - 499,999
Consulting compensation
recognized for warrants
issued - - - 1,242,584 - - 1,242,584
Net loss December 31, 1999 - - - - - (2,567,535) (2,567,535)
------------ ------------ ------------ ------------ ------------ ------------
Balances at
December 31, 1999 - 10,395,679 10,395 2,762,188 - (2,786,752) (14,169)
Issuance of stock for
equity in World Commerce
Network, LLC 1.97 4,663 5 9,176 - - 9,181
Issuance of stock for
acquisition of
Intellipay, Inc. 1.80 2,400,000 2,400 4,317,601 - - 4,320,001
Issuance of stock for
debt conversion 2.50 400,000 400 999,600 - - 1,000,000
Issuance of stock for
debt conversion 1.00 1,040,000 1,040 1,036,496 - - 1,037,536
Issuance of stock for
insurance policy 1.44 18,000 18 25,926 - - 25,944
Issuance of stock for
debt conversion 1.00 600,000 600 599,400 - - 600,000
Issuance of stock for cash 2.50 150,000 150 374,850 - - 375,000
Consulting compensation
recognized for warrants
granted - - - 13,216 - - 13,216
Compensation recognized for
stock options granted - - - 15,150 - - 15,150
Net loss December 31, 2000 - - - - - (5,259,691) (5,259,691)
------------ ------------ ------------ ------------ ------------ ------------
Balances at December 31, 2000 - 15,008,342 15,008 10,153,6030 - (8,046,443) 2,122,168
(Continued)
F-17
51
Pacific WebWorks, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 2001, 2000, and 1999
Additional Stock
Price per Common Stock Paid-in Subscriptions Accumulated
share Shares Amount Capital Receivable Deficit Totals
------------ ------------ ------------ ------------ ------------ ------------ ------------
<s> <c> <c> <c> <c> <c> <c> <c>
Issuance of stock for
deposit and rent 0.50 537,200 537 268,0630 - - 268,600
Issuance of stock for
acquisition of Logio, Inc. - 5,791,980 2,792 2,447,199 - - 2,449,991
Issuance of stock for
prepaid legal and
investment banking
services 0.52 289,166 289 149,711 - - 150,000
Cash received for other
contributed capital - - - 1,475 - - 1,475
Units issued for cash and
debt conversion:
Stock 0.32 4,000,000 4,000 1,276,000 - - 1,280,000
Warrants (4,000,000 granted) 0.08 - - 320,000 - - 320,000
Additional expense recognized
for excess fair value of
warrants over cash and
conversion value 0.02 - - 77,134 - - 77,134
Issuance of stock for
insurance policies 0.35 200,000 200 69,800 - - 70,000
Issuance of stock for
warrants exercised 0.32 250,000 250 79,750 (40,000) - 40,000
Consulting compensation
recognized for warrants
granted - - - 116,712 - - 116,712
Compensation recognized for
stock options granted - - - 38,703 - - 38,703
Net loss December 31, 2001 - - - - - (5,045,193) (5,045,193)
------------ ------------ ------------ ------------ ------------- ------------
$26,076,688 $ 23,076 $14,998,150 $ (40,000) $(13,091,636) $ 1,889,590
============ ============ ============ ============ ============= ============
The accompanying notes are an integral part of this financial statement
F-18
52
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies consistently applied in the
presentation of the accompanying consolidated financial statements follows.
1. The Company
Pacific WebWorks, Inc. and its subsidiaries (Company), engage in the
development and distribution of web tools software, electronic business
storefront hosting, and Internet payment systems for individuals and small to
mid-sized businesses.
The Company was organized under the laws of the state of Nevada on May 18,
1987 as Asphalt Associates, Inc. On December 31, 1998, the board of directors
changed the name of the Company to Pacific WebWorks, Inc. On January 11,
1999, the Company merged with Utah Webworks, Inc., a Utah corporation
organized April 10, 1997. The share exchange with Utah Webworks was accounted
for as a reverse merger, therefore, all financial information prior to January
11, 1999 is that of the accounting survivor, Utah Webworks.
2. Principles of Consolidation
The accompanying condensed consolidated financial statements include the
accounts of Pacific WebWorks, Inc. and its wholly owned subsidiaries,
Intellipay, Inc., World Commerce Network, LLC. (a non-operating company), and
Logio, Inc. (a non-operating, development company). All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain prior period balances have been reclassified to conform with current
period presentation.
3. Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes. Management
believes that the estimates used in preparing the financial statements are
reasonable and prudent; however, actual results could differ from these
estimates. Significant estimates include the allowance for doubtful accounts
and certain accrued liabilities such as accrued penalties, interest for taxes
and contingent liabilities.
4. Cash Equivalents
The Company considers all highly liquid debt instruments with maturity of
three months or less when purchased to be cash equivalents.
F-19
52
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
5. Depreciation and amortization
Depreciation of property and equipment is provided on the straight-line method
over the estimated useful lives of the assets. Accelerated methods of
depreciation of property and equipment are used for income tax purposes.
Depreciation expense for the years ended December 31, 2001, 2000 and 1999
totals $458,155, $126,708 and $28,572, respectively.
Goodwill and other intangible assets are amortized over the periods of
expected future benefit at the business unit level, estimated at three to five
years.
6. Fair value of financial instruments
The fair value of the Company's cash and cash equivalents, receivables,
accounts payable, accrued liabilities and capital lease obligations
approximate carrying value based on their effective interest rates compared to
current market prices.
7. Revenue Recognition
The Company recognizes revenue in accordance with the Securities and Exchange
Commission, Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in
Financial Statements." SAB 101 clarifies application of generally accepted
accounting principles to revenue transactions. The Company also follows SOP
97-2.
Revenues from up-front fees are deferred and recognized over the period
services are performed (which is generally one year). Revenues from monthly
hosting, maintenance, transaction and processing fees are recorded when
earned.
8. Impairment of Long-Lived and Intangible Assets
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, which requires that impairment losses be recognized
on such assets when indicators of impairment are discovered and estimated
undiscounted future cash flows to be generated from those assets are less than
their carrying value. As of June 30, 2001, and as a result of certain events
and management's assessment of impaired assets, the Company recorded $911,532
in losses relating to the impairment of certain long-lived assets in Logio,
Inc. and $1,776,768 in losses relating to the impairment of goodwill for
Logio, Inc. and World Commerce Network.
F-20
53
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
9. Income Taxes
The Company utilizes the liability method of accounting for income taxes.
Under the liability method, deferred income tax assets and liabilities are
provided based on the difference between the financial statement and tax bases
of assets and liabilities measured by the currently enacted tax rates in
effect for the years in which these differences are expected to reverse.
Deferred tax expense or benefit is the result of changes in deferred tax
assets and liabilities.
10. Net Loss Per Share
The computation of net loss per share of common stock is based on the weighted
average number of shares outstanding during each period presented.
Potentially issuable common shares totaling 9,240,485 were excluded from the
calculation of diluted loss per share because their effects were
anti-dilutive.
11. Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards No. 141 (SFAS 141), "Business
Combinations" and No. 142 (SFAS 142), "Goodwill and Other Intangible Assets",
which establishes new standards for the treatment of goodwill and other
intangible assets. SFAS 142 is effective for fiscal years beginning after
December 31, 2001. SFAS 142 prescribes that amortization of goodwill will
cease as of the adoption date.
Additionally, the Company will be required to perform an impairment test on
goodwill and other intangible assets as of the adoption date, annually
thereafter, and whenever events and circumstances occur that might affect the
carrying value of such assets. The Company estimates that the effect of
ceasing the amortization of goodwill related to SFAS 142 will be material to
the company's financial statements subsequent to the adoption date. The
Company amortizes approximately $906,000 annually of goodwill for its
Intellipay subsidiary. The Company has not yet determined what effect, if
any, the impairment test of goodwill and other intangible assets will have on
the Company's results of operations and financial position. The Company does
not believe that SFAS 141 will have a material impact on its financial
position and results of operations.
In October 2001, the FASB issued Statement of Financial Accounting Standard
No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of Long-Lived
Assets". SFAS replaces Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS 144
prescribes, among other things, an accounting model for long-lived assets to
be disposed of including sales and discontinued operations. The Company is
evaluating the impact of this pronouncement on its financial position and
results of operations in future filings.
F-21
54
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE B - MANAGEMENT'S PLANS AND ISSUES AFFECTING LIQUIDITY
The Company's financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has a limited operating
history and has sustained losses since inception. In addition the Company had
negative cash flows from operations of $1,150,272, $2,100,149 and $1,246,227
during the year ended December, 2001, 2000 and 1999, respectively. The
company had negative working capital of $1,337,890, and $2,583,400 at December
31, 2001, and 2000, respectively. As a result, the Company has relied
significantly upon equity and debt funding to support certain of its
operations.
The Company and its subsidiaries are working through various matters related
to liabilities and disputes with vendors and other creditors which may impact
its cash position. Such liabilities include: approximately $440,000 of
capital leases in default (see Note G), approximately $244,000 in payables
past due and accrued liabilities (see Note G), and approximately $24,000 in a
bank overdraft related to Logio, Inc., an inactive subsidiary; approximately
$157,000 in estimated monies owed to a financing company for recourse on lease
funding for customers that fell into default and other estimated refunds(see
Note F), and approximately $524,000 in other payables and payables past due
(see Note G) related to the World Commerce Network, LLC subsidiary, which is
inactive; approximately $85,000 in payroll taxes past due to the Federal
government related to the Intellipay, Inc. subsidiary; and approximately
$380,000 in other trade payables and accrued liabilities related to Pacific
WebWorks, Inc. and Intellipay, Inc. in the normal course of business.
Based on the liabilities discussed above related to inactive, non-revenue
producing companies, Logio, Inc. and World Commerce Network, LLC may be
required to seek bankruptcy protection.
The Company is reliant on significant resellers for the distribution of its
products (see Note M).
During the year ended December 31, 2001, the Company has taken steps to reduce
its burn rate in order to meet its monthly cash requirements from operations
with its reoccurring monthly cash revenues. This has been accomplished
through a reduction in personnel, relocation to lower-cost office facilities
and other expense reduction activities. The Company has also focused its
immediate attention to the operations and growth of its core business units:
Pacific WebWorks, Inc. and Intellipay, Inc. In the course of these
activities, the Logio, Inc. subsidiary, which had temporarily ceased
development and operations of its Internet products, became unable to make
payment on its payables and certain of its capital lease agreements related to
hardware and infrastructure. As a result of these defaults, Logio's most
significant creditor obtained possession of the equipment under its lease
agreements in May of 2001. These events have caused impairments related to
the loss of the equipment under capital leases, other long-lived assets
related to the equipment and the goodwill of the subsidiary to be recorded
during 2001(see Notes D, E and G). Impairment losses recorded for these
events and the assessment of impairment of goodwill related to the World
Commerce Network subsidiary resulted in $2,688,300 of impairment losses for
the year ended December 31, 2001
F-22
55
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE B - MANAGEMENT'S PLANS AND ISSUES AFFECTING LIQUIDITY - CONTINUED
In February 2002, the Company closed the physical office of its Intellipay
subsidiary in Fremont, California and is in the process of moving its
technological infrastructure to Salt Lake City, Utah to achieve certain
operational efficiencies. Management estimates that, once the move is
complete in May 2002, it will generate up to $40,000 monthly in additional
cash flows related to the elimination
of duplicative operating expenses. Management also anticipates that this move
will allow for improved integration of Intellipay products into Pacific
WebWorks products which could increase consolidated sales and market share.
In May of 2001, the Company entered into a stock purchase agreement with
certain of its existing shareholders and other entities pursuant to the sale
of 4,000,000 shares of its common stock and warrants for $1,600,000 (see Note
H). The funding was used to retire certain debt and is being used to support
operations.
The Company expects to generate positive cash flows from operations through
continued burn rate reduction and our business development and sales
activities as early as first quarter 2002. The
Company's cash requirements in excess of monthly cash inflows until this point
will be funded primarily by the net cash received from our May offering (see
Note H). Further equity placements and debt issuance may be required to
support the growth and expansion of operations and to pay existing liabilities
of the active subsidiaries of the Company.
There is substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments to reflect
the possible effects on the recoverability and classification of assets or the
amounts and classification of liabilities that may result from the outcome of
this uncertainty.
NOTE C - ACQUISITIONS
1. Acquisition of Logio, Inc.
On February 8, 2001, Pacific WebWorks completed its acquisition of Logio,
Inc., a development stage company, in a stock-for-stock exchange. Pacific
WebWorks exchanged approximately 2,800,000 shares of its common stock for
18,425,830 shares of Logio, Inc. common stock. This transaction was accounted
for on the purchase method of accounting using generally accepted accounting
principles and valued at approximately $2,450,000 representing the fair value
of the Pacific WebWorks shares on the date of exchange. Goodwill totaling
$1,855,388 began to be amortized over three years in 2001 and approximately
$242,967 was amortized for the period from acquisition to December 31, 2001.
The Company's remaining goodwill related to the acquisition of Logio has been
impaired in second quarter 2001 totaling $1,612,420 (Note E). Logio's results
of operations are included in the Pacific WebWorks, Inc. consolidated results
of operations from the acquisition date to December 31, 2001 and it's the fair
values of its assets and liabilities have also been recorded on the
acquisition date and are included in the Pacific WebWorks, Inc. consolidated
balance sheet. Logio, Inc. is currently a non-operating Internet development
company.
F-23
56
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE C - ACQUISITIONS - CONTINUED
2. Acquisition of Intellipay, Inc.
On April 4, 2000, the Company completed the Agreement and Plan of
Reorganization with Intellipay, Inc., a private Delaware corporation. The
Company issued 2,400,000 shares of common stock valued at approximately
$4,320,000 for all of the outstanding shares of Intellipay. As such,
Intellipay became a wholly owned subsidiary of the Company. This transaction
was accounted for on the purchase method of accounting using generally
accepted accounting principles. Goodwill totaling $4,532,713 is being
amortized over three years. Intellipay's results of operations are included
in the Pacific WebWorks, Inc. consolidated results of operations for the year
ended December 31, 2001 and from the acquisition date to December 31, 2000 and
it's the fair values of its assets and liabilities have also been recorded
on the acquisition date and are included in the Pacific WebWorks, Inc.
consolidated balance sheet. Intellipay historically operated in the San Jose,
California area.
Amortization expenses related to the goodwill for the Intellipay business unit
total $906,547 and $679,916 for the years ended December 31, 2001 and 2000
with no amortization in 1999.
3. Acquisition of World Commerce Network, LLC
In June 2000, the Company paid $100 for 49% of the outstanding shares of World
Commerce Network LLC, completing its 100% membership interest in the entity.
Previously, effective January 1, 2000, the Company had issued 4,663 shares of
its common stock to U.S. Merchant Systems, Inc. for 1% of the outstanding
stock of World Commerce Network, Inc. The shares were valued at $9,180. The
January 1, 2000 issuance increased the Company's membership investment in
World Commerce Network to 51% and it became a consolidated entity with Pacific
WebWorks, Inc. at that time. Prior to the additional 1% purchase, the Company
owned 50% of the World Commerce Network Joint Venture and recorded its
investment using the equity method of accounting.
World Commerce Network is currently a non-operating marketing company.
Goodwill totaling $240,541 began to be amortized over three years in 2001 and
approximately $24,060 and $52,123 was amortized for the years ended December
31, 2001 and 2000, respectively. All remaining goodwill amounts associated to
this business unit have been recorded as an impairment in 2001 totaling
$164,348 (Note E).
F-24
57
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment includes the following:
December 31, Estimated
2001 2000 useful lives
------------- ------------- -------------
Computer Equipment $ 421,770 $ 332,714 3-5
Equipment 83,961 96,833 3-7
Software 83,971 74,342 3-5
Furniture and Fixtures 95,112 72,090 5-8
Leasehold Improvements - 6,667 Life of lease
------------- -------------
684,814 582,646
Less Accumulated Depreciation (421,986) (208,387)
------------- -------------
$ 262,828 $ 374,259
============= =============
Impairment charges totaling $911,532 were recorded in Logio, Inc. during the
year ended December 31, 2001 representing equipment under capital lease
agreements which were in default, primarily returned to hardware vendors, cash
down payments and related equipment and software. Loss on sale or abandonment
of property and equipment totals $69,319 for the nine months ended December
31, 2001.
NOTE E - OTHER ASSETS
Other assets include the following: December 31,
2001 2000
------------- -------------
Goodwill $ 6,628,642 $ 4,773,255
Acquired technology 824,480 824,480
Other 19,250 20,258
------------- -------------
7,472,372 5,617,993
------------- -------------
Accumulated amortization (2,730,950) (1,286,014)
Impairment losses (1,776,768) -
------------- -------------
$ 2,964,654 $ 4,331,979
============= =============
The Company has focused its immediate attention to the operations and growth
of its core business units: Pacific WebWorks, Inc. and Intellipay, Inc. In
the course of these activities, the Logio, Inc. subsidiary, which had
temporarily ceased development and operations of its Internet products, became
unable to make payment on its payables and certain of its capital lease
agreements related to hardware and infrastructure. As a result of these
defaults, Logio's most significant creditor obtained possession of the
equipment under its lease agreements in May of 2001. These events have caused
impairment to the goodwill related to Logio to be recorded during 2001.
Impairment losses recorded for these events and the assessment of impairment
in the World Commerce Network subsidiary resulted in $1,776,768 of impairment
losses for the year ended December 31, 2001.
F-25
58
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE E - OTHER ASSETS - CONTINUED
The remaining goodwill recorded as other assets as of December 31, 2001
relates to the Intellipay, Inc. business unit and approximates $4,533,000 with
approximately $1,586,500 in accumulated amortization as of December 31, 2001.
Acquired technology has been fully amortized as of December 31, 2001 and
represents the core Intellipay product technology.
NOTE F - ACCRUED AND OTHER LIABILITIES
Accrued liabilities consist of the following: December 31,
2001 2000
------------- -------------
Payroll related liabilities $ 147,162 $ 139,096
Interest payable 58,894 14,192
Reseller commissions 65,690 39,400
Contingent liabilities 30,000 -
Other 182 473
------------- -------------
$ 301,928 $ 193,161
============= =============
Payroll related liabilities totaling $147,162 at September 30, 2001 include
approximately $85,000 in estimated taxes, penalties and interest past due from
Intellipay, Inc. to the Internal Revenue Service for periods prior to and
immediately after its acquisition by Pacific WebWorks, Inc.
Other current liabilities consist of estimated returns and chargebacks from a
leasing company that funded customer purchases and placed them on a payment
plan during 2000. The Company is responsible for recourse on leases on which
customers have not made first payment. Estimated chargebacks and other
estimated returns and refunds approximate $222,000 at December 31, 2001 and
$197,000 at December 31, 2000 for all companies under consolidation. The
Company makes an effort to further collect all amounts that have fallen under
recourse with the leasing company.
NOTE G - PAYABLES AND CAPITAL LEASES IN DEFAULT
In March 2001, Logio, Inc., a subsidiary of Pacific WebWorks, Inc., was unable
to make payment on some of its capital lease obligations. Logio, Inc.
transferred the equipment back to the vendor in May of 2001. The default on
these and other capital lease obligations, approximating $440,000 at December
31, results in impairment losses of $122,685, representing cash down payments
by Logio at the beginning of the leases that were being amortized over the
life of the leases and $788,847 in equipment under capital leases and related
software and equipment (Note D). The leases expire through December 2002.
F-26
59
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE G - PAYABLES AND CAPITAL LEASES IN DEFAULT - CONTINUED
During 2000, the Company received cash of $216,580 from a corporation. The
note is due on demand and non-collateralized. Accrued interest on this note
totals $36,876 at December 31, 2001.
Other payables past due for Logio and World Commerce Network represent trade
liabilities to vendors totaling $290,795, including approximately $120,000
past due to a software corporation. Many of the liabilities past due are in
dispute by Logio and World Commerce Network.
NOTE H - RELATED PARTY TRANSACTIONS
Unit Purchase Agreement
- -----------------------
On May 30, 2001, the Company entered into a unit purchase agreement with three
entities for the purchase of 4,000,000 units, each of which includes one share
of the company's common stock and one warrant for the purchase of one common
share at an exercise price of $0.80 per share. The shares were issued in a
private placement into escrow and funding was also placed in escrow in
accordance with the agreement. The shares and monies were to be released to
each party provided that a registration statement was filed with the
Securities and Exchange Commission on or before July 25, 2001 to register the
sale of the shares and warrants and provided that the registration statement
was declared effective by the Securities and Exchange Commission on or before
September 28, 2001. The Company would have been responsible for liquidated
damages for failure to meet the above requirements totaling five percent of
the purchase price of the then outstanding securities for every 30 calendar
day period until the registration statement was filed or made effective.
In mid July, the Securities and Exchange Commission notified the Company that
its registration statement (Form SB-2, as amended) would become effective.
Pursuant to the unit purchase agreement, a total of $1,600,000, representing a
$0.40 per unit sales price, was released from escrow as follows: a total of
$1,214,000 of notes payable and interest to shareholders was paid in full as
held in escrow, $10,000 was paid to the escrow agent for services rendered and
the remaining $376,000 was funded to the Company. The fair value of the
common stock component of each unit was $0.32 and the warrant component of
each unit was valued at $0.10 each using the Black Scholes valuation model.
The remaining $0.02 in value given per unit in excess of value received has
been recorded in the operating statement under compensation for warrants
totaling $77,134 during 2001.
In February 2000, the Company entered into a unit purchase agreement with two
accredited investors for the purchase of 400,000 units for $1,000,000. Each
unit consisted of one share of the Company's common stock, and two warrants.
One warrant grants the investor the right to purchase one additional share of
the Company's common stock at an exercise price of $5.00 and one warrant
grants the investor the right to purchase 1/2 of one additional share at an
exercise price of $7.50.
F-27
60
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE I - STOCKHOLDERS' EQUITY
1. Equity Incentive Plan
On March 8, 2001, the Board of Directors adopted the Pacific WebWorks, Inc.
2001 Equity Incentive Plan (the Plan). The Plan allows for the granting of
awards in the form of stock options, stock appreciation rights or restricted
shares to employees, independent directors and certain consultants. The
Company may grant awards representing up to 5,000,000 shares of the Company's
common stock under the Plan. The Plan has not been approved by the Company's
shareholders as of December 31, 2001
Directors, officers, employees and certain consultants have been granted
options to acquire 3,640,485 shares of the company's common stock. The
options were granted at exercise prices ranging from $0.75 - $3.53 per share.
The options vest periodically through October 2003 and expire through April
2011.
Fair market value of options granted
The Company has adopted only the disclosure provisions of Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation" (FAS 123).
Therefore, the Company accounts for stock based compensation under Accounting
Principles Board Opinion No. 25, under which approximately $38,700, $15,018
and $0 has been recognized in the years ended December 2001, 2000 and 1999,
respectively for compensation earned related to options issued at exercise
prices that were less than the fair market value of the Company's stock on the
date of grant. Had compensation cost for the stock based compensation been
determined based upon the fair value of the options at the grant date
consistent with methodology set forth by FAS 123, the Company's net loss and
loss per share would have increased to the following proforma amounts:
Year Ended December 31,
2001 2000 1999
------------- ------------- -------------
Net Loss As Reported $ (5,045,193) $ (5,259,691) $ (2,567,535)
Pro forma (5,926,731) (6,140,291) (2,572,861)
Net loss per common
share - basic and
fully diluted As Reported (0.24) (0.40) (0.27)
Pro forma (0.26) (0.47) (0.27)
F-28
61
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE I - STOCKHOLDERS' EQUITY (CONTINUED)
1. Equity Incentive Plan - Continued
Fair market value of options granted - Continued
The fair value of these options was estimated at the date of grant using the
Black-Scholes American option-pricing model with the following
weighted-average assumptions for 2001, 2000 and 1999: expected volatility of
125 percent, 201 percent and 168 percent, respectively; risk-free interest
rate of 6.25 percent 6.5 percent and 6.75 percent, respectively; and expected
life of 3.5 years. The weighted-average fair value of options granted was
$0.56, $1.75 and $2.38 in 2001, 2000 and 1999, respectively.
Option pricing models require the input of highly sensitive assumptions,
including expected stock volatility. Also, the Company's stock options have
characteristics significantly different from those of traded options, and
changes in the subjective input assumptions can materially affect the fair
value estimate. Management believes the best input assumptions available were
used to value the options and that the resulting option values are reasonable.
Information with respect to the Company's stock options as of December 31,
2001:
Weighted-average
Stock options Exercise price exercise price
------------- -------------- ---------------
Outstanding at January 1, 1999 - $ - $ -
Granted 797,474 2.00-3.53 2.38
Exercised - - -
Forfeited - - -
------------- -------------- ---------------
Outstanding at December 31, 1999 797,474 2.00-3.53 2.38
Granted 281,700 1.06-1.75 1.75
Exercised- - - -
Forfeited 371,568 1.06-3.44 2.39
------------- -------------- ---------------
Outstanding at December 31, 2000 707,606 1.06-3.53 2.21
Granted 3,250,251 0.75-0.87 0.76
Exercised - - -
Forfeited 317,372 0.75-2.63 1.44
------------- -------------- ---------------
Outstanding at December 31, 2001 3,640,485 $ 0.75-3.53 $ 0.97
============= ============== ===============
F-29
62
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE I - STOCKHOLDERS' EQUITY (CONTINUED)
1. Equity Incentive Plan- Continued
Additional information related to stock options outstanding and exercised at
December 31, 2001:
Options outstanding
Weighted-
Number Weighted-average average remaining
Exercise price outstanding exercise price contractual life (years)
---------------- ----------- ---------------- -----------------------
$3.53-$3.44 87,879 $3.50 3
2.63 44,779 2.63 3
2.00 255,000 2.00 3
1.75 125,000 1.75 4.7
1.06 50,000 1.06 5
0.87 150,327 0.87 9.25
0.75 2,927,500 0.75 9.25
-----------
3,640,485
===========
Options exercisable
Number Weighted-average
Exercise price exercisable exercise price
----------------- --------------- ------------------
$3.53-$3.44 58,586 $3.49
2.63 29,853 2.63
2.00 100,000 2.00
1.75 125,000 1.75
1.06 50,000 1.06
0.87 150,327 0.87
0.75 975,833 0.75
2. Warrants for common stock
As of December 31, 2000, warrants for the purchase of 5,600,000 shares of the
Company's common stock were outstanding and exercisable. The warrants
outstanding and exercisable have exercise prices ranging from $5.00 to $7.50
per share. Warrants expire through April 2006.
As discussed in Note H, warrants to purchase 4,000,000 shares, valued at $0.10
each were granted in an equity offering at an exercise price of $0.80 per
share.
F-30
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Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE I - STOCKHOLDERS' EQUITY (CONTINUED)
2. Warrants for common stock - Continued
On April 25, 2001, the Company entered into an agreement with a consultant to
provide investor relations, public relations, and fulfillment services related
to financing in exchange for warrants. A total of 500,000 warrants were
issued at an exercise price of $0.50 per share under the terms of
the agreement and 500,000 were issued at an exercise price of $0.75 per share
for a total of
1,000,000 warrants granted under this agreement. The warrants are fully
vested as of December 31, 2001. Deferred consulting charges related to this
agreement approximate $175,000 and represent the fair value of the warrants
using the Black Scholes valuation model. The services under this contract will
be performed through April 25, 2002 and the fair value of the warrants are
recognized ratably over the service period. Total compensation expense from
the issuance of these warrants totaled $116,715 for the year ended December
31, 2001. The agreement terminates in April of 2002 when the services are
completed and the options expire in April 2006.
In February 2000, warrants to purchase 600,000 shares, were granted in
conjunction with an equity offering at exercise prices of ranging from $5.00
to $7.50 per share. These warrants expire in February 2005.
In January 1999, the Company issued warrants to purchase up to 400,000 shares
of the Company's common stock to its investor relations firm for consulting
services received through February 2000. Compensation expense as calculated
using the Black Scholes model totaled $1,242,584. A total of $13,216 and
$1,242,584 of the related charges were recognized during the years ended
December 31, 2000 and 1999 respectively. All of these warrants have been
exercised as of December 31, 2001.
3. Issuance of stock
In December 2001, the Company issued 250,000 shares of its common stock for
the exercise of warrants at $0.32 per share for $40,000 in cash and a $40,000
stock subscription receivable.
In August 2001, the Company issued a total of 200,000 shares of its common
stock as a prepayment for certain insurance services totaling $70,000. The
services will be provided and related expenses will be recognized over the
one-year period in which the services are to be received by the Company.
As discussed in Note H, common stock totaling 4,000,000 shares, valued at
$0.32 each, were issued in the May 2001 equity offering.
In April 2001, the Company issued a total of 289,166 shares of its common
stock as a prepayment for legal, investment banker, and insurance services
totaling $150,000.
F-31
64
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE I - STOCKHOLDERS' EQUITY (CONTINUED)
3. Issuance of stock - Continued
The related expenses will be recognized over the periods in which the services
are received.
As discussed in Note C, common stock totaling 2,791,980 shares were
effectively issued to Logio, Inc. shareholders in a stock-for-stock exchange
in order to acquire Logio as a wholly owned subsidiary.
During January 2001 the Company issued a total of 537,200 shares of common
stock to a related party for $268,600 related to a rental deposit and three
months of rental for the temporary use of an operations center in Salt Lake
City, Utah.
During October 2000, the Company issued 150,000 shares of its common stock for
the exercise of warrants at $2.50 per share for cash of $375,000.
During September 2000, the Company issued 600,000 shares of its common stock
at $1.00 per share for payment on notes payable of $600,000.
During August 2000, the Company issued 18,000 shares of its common stock at
$1.44 per share for an insurance policy valued at $25,945.
During June 2000, the Company issued 1,040,000 shares of its common stock at
$1.00 per share for payment on notes payable and accrued interest of
$1,037,536.
During June 2000, the Company issued 400,000 shares of its common stock at
$2.50 per share for payment on notes payable of $1,000,000.
During April 2000, the Company issued 2,400,000 shares of its common stock at
$1.80 per share for all outstanding stock of Intellipay, Inc.
During January 2000, the Company issued 4,663 shares of its common stock at
$2.00 per share for 1% of the outstanding stock of World Commerce Network,
LLC.
During December 1999, the Company issued 381,679 shares of its common stock at
$2.62 per share for payment on notes payable of $500,000.
During September 1999, the Company issued 14,000 shares of its common stock at
$1.43 per share for an insurance policy valued at $20,000.
During January 1999, Pacific WebWorks, Inc. (a public company) entered into an
agreement and Plan of Reorganization with Utah Webworks, Inc. (a private
company). The agreement provides for the merger of the Company into Utah
Webworks to be treated as a reverse merger, thus making Utah Webworks the
accounting survivor.
F-32
65
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE I - STOCKHOLDERS' EQUITY (CONTINUED)
3. Issuance of stock - Continued
Pursuant to the agreement the Company issued 5,000,000 shares of the Company's
common stock to the shareholders of Utah Webworks for all of their shares in
that company. Because the historical financial information prior to the
reorganization date (January 11, 1999) was that of Utah Webworks, the
accounting survivor, a 5,000 to 1 forward stock split was retroactively
applied to the shares of Utah Webworks to show the effects of the reverse
merger. The 5,000,000 share reorganization adjustment represents the shares
held by the shareholders of the public company.
NOTE J - COMMITMENTS AND CONTINGENCIES
1. Threatened litigation
In February 2001, the Company received notice from the State of Utah Labor
Commission regarding an allegation of racial discrimination charged by a
former employee. The former employee claims that he was forced to resign as
our sales manager due to demotions and pay cuts related to alleged prejudicial
treatment based on his race and color. We have responded to the request for
information from the Labor Commission and have stated that we believe the
former employee was treated fairly while employed by the Company. At this
time, the former employee has not identified any specific remedy and we are
awaiting further action.
In April 2001, one of the World Commerce Network's former vendors filed a
complaint alleging default under a certain application for credit and personal
guaranty made by a former officer of the Company. The vendor seeks
approximately $65,000 plus interest. The Company is defending the claim and
believes the amount should be reduced based upon the vendor's performance and
other disputes. The Company has filed an answer to the complaint and further
litigation is pending. The Company has recorded amounts in the consolidated
financial statements representing its estimated liability for this matter.
Management believes that the amount recorded is sufficient to cover the
resulting liability from this complaint, if any.
As mentioned in Notes B and G to the financial statements, the Logio, Inc. is
in default of certain of its capital leases and payables.
The Company is involved in other various disputes and legal claims in the
normal course of business. It is not possible to state the ultimate
liability, if any, in these matters. In the opinion of management, any
resulting litigation will have no material effect on the financial position
and results of operations of the Company in excess of amounts recorded.
F-33
66
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE J - COMMITMENTS AND CONTINGENCIES (CONTINUED)
2. Operating leases
The Company leases office space for its operations in Salt Lake City, Utah and
in Freemont, California. Combined monthly charges under the two lease
agreements approximate $11,500 as of December 31, 2001 and the Company rented
a data center for four months in 2001 and four months in 2000 for
approximately $26,000 each month. Total rent expense for all rented office
and data center space approximated $242,000, $242,000 and $97,090 for the
years ended December 31, 2001, 2000 and 1999, respectively. The following is
a schedule of future minimum lease payments under the operating leases:
Year ended Lease
December 31, Commitment
------------ ----------
2002 $130,416
2003 134,856
Thereafter -
----------
$265,272
==========
3. Other
In June 2001, the Company received notice from a leasing company that funded
customer purchases and placed them on a payment plan during 2000 that leases
for any known customer lease documentation issued to the customer incomplete
would be charged back to the Company. Lease documentation was processed by
third parties for World Commerce Network and the Company is unable to estimate
the extent of incomplete documentation, if any, as of September 30, 2001.
F-34
67
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE K - INCOME TAXES
The tax effects of temporary differences giving rise to deferred tax assets
and liabilities are as follows:
2001 2000 1999
------------- ------------- -------------
Deferred tax assets
Allowance for doubtful accounts $ 14,716 $ 1,649 $ -
Net operating loss carryforwards 3,602,073 2,663,609 1,054,384
Excess book depreciation and
amortization 1,172,078 87,670 -
Other, net 398 398 398
------------- ------------- -------------
4,789,265 2,753,326 1,054,782
Less valuation allowance (4,719,441) (2,713,310) (839,949)
------------- ------------- -------------
69,824 40,016 214,833
Deferred tax liabilities
Excess tax depreciation
and amortization - - (214,833)
Other, net (69,824) (40,016) -
------------- ------------- -------------
Net tax assets $ - $ - $ -
============= ============= =============
As of December 31, 2001, the Company has net operating loss carryforwards for
tax reporting purposes of approximately $9,000,000 which expire from 2019
through the year 2021. Utilization of the net operating loss is dependent on
the future profitable operation of the Company and each of its subsidiaries.
Accordingly, a valuation allowance has been recorded to reduce the net
deferred tax asset to zero.
F-35
68
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE L - SEGMENT REPORTING
Although the Company operates in one business segment, the production and
distribution of business e-commerce software, during 2001 management reporting
commenced by individual business unit.
Segment reporting by business unit follows:
Year ended Pacific
December 31, 2001(a) WebWorks Intellipay WCN Logio(b)
- ------------------------- ------------ ------------ ------------ ------------
Current assets $ 418,364 $ 84,318 $ 38,414 $ -
.
Total assets 5,669,336 190,720 38,414 91,791
Current liabilities 401,170 198,631 463,960 708,306
Total liabilities 401,170 1,598,858 1,366,282 844,018
Revenues, net $ 1,111,416 $ 923,416 $ 1,071,506 $ -
Income (loss) from
operations (4,116,516) (352,281) 901,311 (1,313,939)
Net income (loss) $(4,069,600) $ (483,182) $ 854,427 $(1,345,611)
____________________________________________________
(a) Amounts include all intercompany receivables, payables, revenues and
expenses prior to elimination for consolidation.
(b) Includes Logio, Inc. from the date of acquisition February 8, 2001 to
December 31, 2001.
F-36
69
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE L - SEGMENT REPORTING (CONTINUED)
Pacific
Year ended December 31, 2000(c) WebWorks Intellipay(d) WCN
- ------------------------------------ ------------- ------------- -------------
Current assets $ 365,856 $ 136,516 $ 253,321
Total assets 6,362,755 585,447 282,014
Current liabilities 1,152,958 425,889 1,544,336
Total liabilities 1,152,958 1,490,780 2,464,310
Revenues, net $ 1,393,960 $ 833,007 $ 3,502,387
Income (loss) from operations (2,499,807) (755,813) (1,947,623)
Net income (loss) $ (2,491,176) $ (817,559) $ (1,950,954)
_________________________________________________
(c)Amounts include all intercompany receivables, payables, revenues and
expenses prior to elimination for consolidation.
(d)Includes Intellipay, Inc. from the date of acquisition April 4, 2000 to
December 31, 2000.
There was no segment reporting data for the year ended December 31, 1999.
F-37
70
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE M - MARKET RISK
The Company distributes its products and services primarily through its active
third party resellers. During 2001 approximately $146,000 and $51,000 of
total net sales derived from monthly hosting and gateway services represents
customer portfolios acquired through the company's two largest active
resellers' efforts, respectively. Customer acquisition from these two active
reseller channels accounts for approximately 12.2% and 10.7% of total hosting
related sales for the year ended December 31, 2001.
The Company's sales plan is currently centered on the accumulation of a
monthly hosting and gateway services portfolio of customers.
During the 2000 fiscal year, three major resellers accounted for 40%, 20% and
17% of the total number of our hosting customer base, respectively.
During the 1999 fiscal year, two major resellers accounted for 20% and 21% of
our software, access and license fee revenue, respectively.
NOTE N - SUBSEQUENT EVENT
On January 18, 2002, an informational hearing was conducted with the State of
Utah Labor Commission regarding an allegation of racial discrimination charged
by a former employee. On February 28, 2002, in a letter from the State of
Utah Labor Commission, the Company was dismissed of all charges related to the
threatened litigation described in Note J to the financial statements.
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We have not authorized any dealer,
salesman or any other person to give
any information or to make any
representations not contained in
this prospectus. Any information or
representation not contained in this Pacific WebWorks, Inc.
prospectus must not be relied upon as
having been authorized by Pacific 5,600,000 Common Shares
WebWorks, Inc.
---------------
_____________ PROSPECTUS
TABLE OF CONTENTS ---------------
Page
Prospectus Summary ........................3
Risk Factors ..............................4
Use of Proceeds ...........................8
Market For Common Equity ..................9
Management's Discussion And Analysis ......10
Business...................................16
Properties ................................23
Legal Proceedings..........................23
Management ................................24
Principal Stockholders ....................27
Description of Securities .................28
Selling Stockholders ......................29 June 20, 2002
Plan of Distribution ......................31
Interest of Named Expert And Counsel ......32
Disclosure of Commission Position on
Indemnification For Securities Act
Liability............................... 33
Available Information..................... 33
Changes in Accountants ................... 33
Financial Statements ..................... 34
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PART II
ITEM 25: OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses paid by Pacific WebWorks in
connection with the sale of the shares. We will pay all the costs of this
offering, with the exception of the costs incurred by the selling stockholders
for their legal counsel and the costs they may incur for brokerage commissions
on the sale of their shares. All the amounts shown include estimates of future
expenses, except for the registration fee:
Securities and Exchange Commission Registration Fee ................$2,612.11
Printing and Engraving Expenses .......................................500.00
Legal and Accounting Fees and Expenses...............................3,000.00
Transfer Agent and Registrar Fees and Expenses ........................600.00
Miscellaneous .........................................................200.00
Total..........................................................$6,912.11
ITEM 26: RECENT SALES OF UNREGISTERED SECURITIES
The following discussion describes all securities sold by Pacific
WebWorks without registration during the past three years
On May 14, 2002, we granted warrants to purchase an aggregate of
1,300,000 common shares to Summit Resource Group, Inc. in consideration for
investor relations consulting services. The exercise prices of the warrants
are 600,000 shares at $0.30, which vest immediately; 400,000 shares at $0.50
which vest September 15, 2002; and 300,000 shares at $0.90, which vest
December 31, 2002. All of the warrants have a two year expiration. We relied
on an exemption from registration for a private transaction not involving a
public distribution provided by Section 4(2) of the Securities Act.
On March 22, 2002, we issued 9,816 common shares to Universal Business
Insurance, Inc. in consideration for prepaid insurance valued at $3,671. We
relied on an exemption from registration for a private transaction not
involving a public distribution provided by Section 4(2) of the Securities
Act.
On August 28, 2001, we issued 200,000 shares valued at $70,000 to
Universal Business Insurance, Inc. in consideration liability insurance,
intrusion technology insurance and directors and officers liability insurance.
We relied on an exemption from registration for a private transaction not
involving a public distribution provided by Section 4(2) of the Securities
Act.
On May 30, 2001, we agreed to issue 4,000,000 units for $1,600,000 to
four accredited investors, AMCAN Services, Inc., Pacific First National, Inc.,
State Management Associates L.C., and TST Corporation. Each accredited
investor purchased 1,000,000 units for $400,000. A unit consisted of one
common share and a warrant to purchase one common share at an exercise price
of $0.80, which expire on May 30, 2003. We relied on an exemption from
registration for a private transaction not involving a public distribution
provided by Section 4(2) of the Securities Act.
On April 25, 2001, we granted warrants to purchase an aggregate of
1,000,000 common shares, valued at approximately $170,000, to Columbia
Financial Group in consideration for investor relations services. One warrant
provided for the purchase of 500,000 common shares at an exercise price of
$0.50 and another warrant allowed the purchase of 500,000 common shares at an
exercise price of $0.75. The warrants may be exercised through April 2006.
We relied on an exemption from registration for a private transaction not
involving a public distribution provided by Section 4(2) of the Securities
Act.
On April 16, 2001, we issued an aggregate of 289,166 common shares in
consideration for services rendered. We issued 130,000 common shares to
Mutual Ventures Corporation for business services valued at $65,000; we issued
20,000 shares to Daniel W. Jackson, an attorney, for legal services valued at
$10,000; and 139,166 common shares to Universal Business Insurance, Inc. for
insurance products and services valued at $83,000. We relied on an exemption
from registration for a private transaction not involving a public
distribution
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provided by Section 4(2) of the Securities Act.
During January 2001 we issued an aggregate of 537,200 common shares
valued at $268,600 to Principal Property Management LLC in consideration for a
security deposit and monthly rent for our corporate office lease. We relied
on an exemption from registration for a private transaction not involving a
public distribution provided by Section 4(2) of the Securities Act.
On September 20, 2000, we issued 600,000 shares valued at $600,000 to
Mutual Ventures Corporation to satisfy a note payable. We relied on an
exemption from registration for a private transaction not involving a public
distribution provided by Section 4(2) of the Securities Act.
On August 21, 2000, we issued 18,000 shares valued at approximately
$26,000 to Donald Mayer, President of Universal Business Insurance, Inc. for
directors and officers insurance purchased from Universal Business Insurance.
We relied on an exemption from registration for a private transaction not
involving a public distribution provided by Section 4(2) of the Securities
Act.
On June 30, 2000, we issued 415,000 shares valued at $415,000 to Capital
Communications, Inc. to satisfy a note payable. We relied on an exemption
from registration for a private transaction not involving a public
distribution provided by Section 4(2) of the Securities Act.
On June 29, 2000, we issued 625,000 shares valued at $625,000 to TAD
Ventures, LLC to satisfy a note payable. We relied on an exemption from
registration for a private transaction not involving a public distribution
provided by Section 4(2) of the Securities Act.
On April 4, 2000, we agreed to issued 2,400,000 common shares valued at
$4,320,000 in exchange for the outstanding shares of IntelliPay, Inc. We
relied on an exemption from registration for a private transaction not
involving a public distribution provided by Section 4(2) of the Securities
Act.
In January 2000, we issued 4,663 common shares, valued at $9,180, to
World Commerce Network, L.L.C. in consideration for an additional 1% interest
in that entity. We relied on an exemption from registration for a private
transaction not involving a public distribution provided by Section 4(2) of
the Securities Act.
On February 22, 2000, we agreed to sell an aggregate of 400,000 units for
an aggregate price of $1 million. Condiv Investments, Inc. and Midwest First
National, Inc. each agreed to buy 200,000 common shares, an "A" Warrant for
200,000 common shares and a "B" Warrant for 100,000 common shares. We relied
on an exemption from registration for a private transaction not involving a
public distribution provided by Section 4(2) of the Securities Act.
On December 28, 1999, we issued 381,679 common shares valued at $500,000,
to SGS Holdings, Inc., as assignee, to convert a portion of notes payable to
Capital Communications, Inc. We relied on an exemption from registration for
a private transaction not involving a public distribution provided by Section
4(2) of the Securities Act.
On September 9,1999, we issued 14,000 common shares valued at $20,000, to
Universal Business Insurance, Inc. in consideration for a directors and
officers' liability insurance policy in the amount of $1,000,000. We relied
on an exemption from registration for a private transaction not involving a
public distribution provided by Section 4(2) of the Securities Act.
In connection with each of the private transactions listed above, we
believe that each purchaser
was aware that the securities had not been registered under federal securities
laws; acquired the securities for his/her/its own account for investment
purposes and not with a view to or for resale in connection with any
distribution for purposes of the federal securities laws; understood that the
securities would need to be indefinitely held unless registered or an
exemption from registration applied to a proposed disposition; and was aware
that the certificate representing the securities would bear a legend
restricting their transfer.
We believe that, in light of the foregoing, the sale of our securities to
the respective acquirers did not constitute the sale of an unregistered
security in violation of the federal securities laws and regulations by reason
of the exemptions provided under 3(b) and 4(2) of the Securities, and the
rules and regulations promulgated thereunder.
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ITEM 27: EXHIBITS
Number Description
- ------ -----------
2.1 Agreement and Plan of Reorganization between Pacific WebWorks and
IntelliPay, Inc., dated April 4, 2000 (Incorporated by reference to
exhibit No. 2.1for Pacific WebWork's Form 8-K, filed April 19, 2000.)
2.2 Agreement and Plan of Reorganization between Pacific WebWorks and
Logio, dated October 31, 2000 (Incorporated by reference to exhibit
No. 2.1 for Pacific WebWork's Form 8-K, filed November 14, 2000.)
3.1 Articles of Incorporation, as amended (Incorporated by reference to
exhibit No. 3.1 for Form 10-Q filed November 13, 2001)
3.2 Amended and Restated Bylaws of Pacific WebWorks, Inc. (Incorporated
by reference to exhibit No. 3.2 for Form 10, as amended, file No.
0-26731, filed July 16, 1999.)
5.1 Opinion of Cindy Shy, P.C. (Previously filed)
10.1 Master Service Agreement between Electric Lightware, Inc., and Utah
WebWorks, Inc., dated February 2, 1998 (Incorporated by reference to
exhibit No. 10.1 for Form 10, as amended, file No. 0-26731, filed
July 16, 1999.)
10.2 Internet Access Agreement, Addendum to Master Service Agreement
between Electric Lightwave, Inc., and Pacific WebWorks, Inc., dated
January 1, 2002 (Incorporated by reference to exhibit No. 10.2 for
Form 10-K, filed March 26, 2002)
10.3 Lease Agreement between Pacific WebWorks, Inc. and Westgate Business
Center, dated November 11, 2001 (Incorporated by reference to
exhibit No. 10.3 for Form 10-K, filed March 26, 2002)
10.4 Strategic Reseller Agreement with U.S. Merchant Systems (Incorporated
by reference to exhibit No. 10.9 for Form 10, as amended, file No.
0-26731, filed July 16, 1999)
10.5 Registration Rights Agreement between Pacific WebWorks and Midwest
First National, Inc. and Condiv Investments, Inc. and Columbia
Financial Group, dated February 22, 2000 (Incorporated by reference
to exhibit No. 10.11 for Form S-1 Registration Statement, File No.
333-38026, effective June 12, 2000.)
10.6 Registration Rights Agreement between Pacific WebWorks and the
Investors, dated May 30, 2001 (Previously filed)
10.7 Consultant Agreement between Pacific WebWorks and Summit Resource
Group, Inc., dated May 14, 2002.
21.1 Subsidiaries of Pacific WebWorks (Incorporated by reference to
exhibit No. 21.1 to Form 10-K, filed April 2, 2001)
23.1 Consent of Chisholm & Associates
23.2 Consent of Cindy Shy, P.C. (Previously filed)
24.1 Power of Attorney (See signature page)
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused the registration statement to be signed on its
behalf by the undersigned, duly authorized, in the city of Salt Lake City,
state of Utah.
PACIFIC WEBWORKS, INC.
a Nevada Corporation
Date: 6/20/02 By: /s/ Christian R. Larsen
Christian R. Larsen, President and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Christian R. Larsen and Kenneth W.
Bell, and each of them, his attorneys-in-fact and agents, each with full power
of substitution and resubstitution, for him in any and all capacities, to sign
any and all amendments (including post effective amendments) to this
registration statement, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully as to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each of said attorneys-in-fact and agents, or any of them,
or their or his substitute or substitutes, may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, the
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Date: 6/20/02 By: /s/ Christian R. Larsen
Christian R. Larsen, President and Director
Date: 6/20/02 By: /s/ Kenneth W. Bell
Kenneth W. Bell, Chief Executive Officer and
Director
Date: 6/20/02 By: /s/ Thomas R. Eldredge
Thomas R. Eldredge, Secretary/Treasurer and
Chief Financial Officer
Date: 6/20/02 By: /s/ Allan E. Oepping
Allan E. Oepping, Director
Date: 6/20/02 By: /s/ Benjamin A. Black
Benjamin A. Black, Director
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